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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[X]  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|     |  |                                                                                         
|     |  | For the fiscal year ended December 31, 2002 or                                          
|     |  |                                                                                         
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-20882

Standard Management Corporation

(Exact name of registrant as specified in its charter)


|                                |  |                    
|------------------------------- |  | -------------------
|Indiana                         |  | 35-1773567         
|(State or other jurisdiction of |  | (I.R.S. employer   
|incorporation or organization)  |  | identification no.)

|                                                             |  |               
|------------------------------------------------------------ |  | --------------
|10689 North Pennsylvania Street, Indianapolis, Indiana 46280 |  | (317) 574-6200
|(Address of principal executive offices)                     |  | (Telephone)   

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [  ]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on February
28, 2003 as reported on The NASDAQ Stock Market, was approximately $25.8
million. Shares of Common Stock held by each executive officer and director and
by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

As of February 28, 2003 Registrant had outstanding 7,857,089 shares of Common
Stock.

Documents Incorporated by
Reference:
Portions of the Registrants definitive Proxy Statement for the Annual Meeting
of Shareholders will be incorporated by reference into Part III of this Form
10-K.





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TABLE OF CONTENTS



|                                                 |  |  |  |  |  |  |  | 
|------------------------------------------------ |  |  |  |  |  |  |  | 
|PART I                                          
|PART II                                         
|PART III                                        
|PART IV                                         
|SIGNATURES                                      
|EX-10.46 EMPLOYMENT AGREEMENT                   
|EX-21 LIST OF SUBSIDIARIES                      
|EX-23.1 CONSENT OF ERNST & YOUNG LLP            
|EX-23.2 CONSENT OF KPMG AUDIT                   
|EX-99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
|EX-99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER



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PART I

As used in this report, unless the context otherwise clearly requires,
we, our, us, Standard Management, and the Company refer to Standard
Management Corporation. All financial information contained in this report is
presented in accordance with generally accepted accounting principles (GAAP)
unless otherwise specified.

Item 1.       BUSINESS OF STANDARD MANAGEMENT

Standard Management is a holding company that a) develops, markets and/or
administers annuity and life insurance products and b) distributes pharmacy
goods and services through its health subsidiary.

On May 24, 2002, we signed an agreement to sell 100% of the shares of
Premier Life (Luxembourg) S.A. (Premier Life (Luxembourg)) and the portfolio
of Premier Life (Bermuda), Ltd. (Premier Life (Bermuda)) (collectively our
International Operations) to Winterthur Life, a division of Credit Suisse
Group. On August 14, 2002, we closed the sale of our Bermuda business and
received net proceeds of $6.5 million. On September 17, 2002, we closed the
sale of Premier Life (Luxembourg) and received net proceeds of $19.2 million.
Accordingly, the International Operations have been reflected as discontinued
operations in our Consolidated Financial Statements included in this report.

Operating Segments

We conduct and manage our business through the following operating
segments reflecting the geographical locations of principal subsidiaries:

Domestic Operations (Continuing operations)includes the following
subsidiaries at December 31, 2002:



| |  |  | Standard Life Insurance Company of Indiana (Standard Life), our
principal insurance subsidiary, was organized in 1934 as an Indiana
domiciled life insurer. It is licensed to write new business or service
existing business in the District of Columbia and all states except New
York and New Jersey. Standard Life offers deferred annuities,
equity-indexed annuities, and single premium immediate annuities.
Effective August 2001, we suspended active marketing of life insurance
products indefinitely, however we continue to manage our in force life
business. Standard Life also generates cash flow and income from closed
blocks of in force life insurance and annuities. Standard Life has a
rating of  B+ (Very Good) from the rating agency A.M. Best Company,
Inc. (A.M. Best).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Dixie National Life Insurance Company (Dixie Life), a 99.5% owned
subsidiary of Standard Life, was organized in 1965 as a Mississippi
domiciled life insurer. Dixie Life is licensed in 22 states and
administers life insurance products, primarily burial expense
policies. Effective January 1, 1999, we ceased selling new business
through Dixie Life, which has a rating of B (Fair) by A.M. Best.                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | Savers Marketing Corporation (Savers Marketing) markets Standard
Lifes products through financial institutions and independent agents.
Savers Marketing also receives administrative, marketing and commission
fees for services provided to unaffiliated companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | U.S. Health Services Corporation (U.S. Health Services) was
organized in 2002 under the laws of the State of Delaware. U.S. Health
Services develops and distributes retail and third party reimbursed
products and services through direct to consumer as well as
institutional channels.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

International Operations (Discontinued operations)included the following
insurance subsidiaries:



| |  |  | Standard Management International S.àr.l. (Standard Management
International) (formerly Standard Management International S.A.), a
wholly owned subsidiary of Standard Management, is a holding company
organized under Luxembourg law with its registered office in Luxembourg.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Premier Life (Luxembourg) primarily offered unit-linked products throughout the European Union.                                                                                                                                                                                   
|
| |  |  | Premier Life (Bermuda) primarily offered unit-linked products in markets throughout the world.                                                                                                                                                                                    

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Marketing

Domestic Marketing

General:Our agency force, of approximately 10,250 independent general
agents, was organized to provide a lower cost alternative to the traditional
captive agency force. These agents distribute a full line of annuity products
issued by Standard Life. We believe that both agents and policy owners value the service we
provide. We assist agents in 1) submitting and processing policy applications,
2) training and education, and 3) marketing support.

Standard Lifeoffers a full portfolio of annuity products selected on the
basis of their competitive position, profitability and likely consumer
acceptance. Such portfolio includes single and flexible premium deferred
annuities, equity-indexed annuities and single premium immediate annuities.
Standard Life does not offer variable annuity products.

Each general agent operates his own agency and is responsible for all
expenses of the agency. The general agents are compensated directly by
Standard Life, which performs issuance, underwriting and accounting functions
related to the policy. Standard Life is not dependent on any one agent or
agency for any substantial amount of its business. No single agent accounted
for more than 3% of Standard Lifes annual annuity sales in 2002, and the top
twenty individual agents accounted for approximately 20% of Standard Lifes
annuity sales in 2002. At December 31, 2002, approximately 66% of Standard
Lifes independent agents were located in Indiana, California, Florida, Ohio
and Michigan with the balance distributed across the country. Standard Life is
attempting to increase the number and geographic diversity of its agents.

Standard Life does not have exclusive agency agreements with its agents.
Therefore, our management believes most of these agents sell similar products
for other insurance companies, which could result in a sales decline if
Standard Lifes products were to become relatively less competitive.

Savers Marketingdistributes life, annuity and health products through
financial institutions and independent general agents. Savers Marketing has
approximately 2,500 active brokers and is not dependent on any one broker or
agency for any substantial amount of its business. Each broker operates
independently and is responsible for all of his or her expenses. Savers
Marketing employs three regional managers, who are responsible for personally
initiating and maintaining direct communications with brokers and are
responsible for the recruitment and training of all new brokers.

Savers Marketing designed and began to market flexible spending accounts
and COBRA services to employer groups in the fall of 2001. Payroll
administration was added to the portfolio of administrative services in May
2002.

U.S. Health Servicesdistributes pharmaceutical products and services to
consumers, various institutional operations, point of care programs and
contract repackaging services. The markets in which U.S. Health Services
competes are generally broad based and competitive. The principal means of
competition include product availability, service and competitive pricing. The
Company is utilizing direct-to-consumer advertising for distribution of
pharmaceutical products.

Currently Marketed Products

We primarily market deferred annuities, equity-indexed annuities, and
single premium immediate annuities domestically. The following table sets
forth the amounts and percentages of our net deposits received from currently
marketed products for the year ended December 31 (in thousands):

|                                                 |                                    |                         |         |         |         |      |       |        |      |   |         |         |         |   |       |      |      |   |         |         |         |  |       |      |      | 
|------------------------------------------------ | ---------------------------------- | ----------------------- | ------- | ------- | ------- | ---- | ----- | ------ | ---- | - | ------- | ------- | ------- | - | ----- | ---- | ---- | - | ------- | ------- | ------- |  | ----- | ---- | ---- | 
|                                                 |                                    |                         |         | 2002    |         | 2001 |       | 2000  
|                                                 |                                    |                         |         |         |         |      |       |       
|                                                 |                                    |                         |         | Amount  |         | %    |       | Amount |      | % |         | Amount  |         | %
|                                                 |                                    |                         |         |         |         |      |       |        |      |   |         |         |         |  
|Domestic products (Continuing operations)        |                                    |                         |         |         |         |      |       |        |      |   |         |         |         |   |       |      |      |   |         |         |         |  |       |     
|                                                 | Deferred annuities                 |                         | $       | 320,659 |         |      |       | 52.2   |      |   | $       | 178,238 |         |   |       | 46.2 |      |   | $       | 94,699  |         |  |       | 26.3 |     
|                                                 | Equity-indexed annuities           |                         |         | 126,009 |         |      |       | 20.6   |      |   |         | 67,159  |         |   |       | 17.4 |      |   |         | 73,122  |         |  |       | 20.3 |     
|                                                 | Single premium immediate annuities |                         |         | 134,782 |         |      |       | 22.0   |      |   |         | 66,269  |         |   |       | 17.2 |      |   |         | 21,506  |         |  |       | 6.0  |     
|                                                 |                                    |                         |         |         |         |      |       |        |      |   |         |         |         |   |       |      |      |   |         |         |         |  |       |     
|                                                 |                                    | Total Domestic Products |         |         | 581,450 |      |       |        | 94.8 |   |         |         | 311,666 |   |       |      | 80.8 |   |         |         | 189,327 |  |       |      | 52.6 | 
|International products (Discontinued operations) |                                    |                         |         |         |         |      |       |        |      |   |         |         |         |   |       |      |      |   |         |         |         |  |       |     
|                                                 | Unit-linked assurance products     |                         |         | 32,384  |         |      |       | 5.2    |      |   |         | 74,364  |         |   |       | 19.2 |      |   |         | 170,514 |         |  |       | 47.4 |     
|                                                 |                                    |                         |         |         |         |      |       |        |      |   |         |         |         |   |       |      |      |   |         |         |         |  |       |     
|                                                 |                                    | $                       | 613,834 |         |         |      | 100.0 |        |      | $ | 386,030 |         |         |   | 100.0 |      |      | $ | 359,841 |         |         |  | 100.0 |     
|                                                 |                                    |                         |         |         |         |      |       |        |      |   |         |         |         |   |       |      |      |   |         |         |         |  |       |     

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Domestic Products

Deferred Annuities.Standard Life markets both single and flexible premium
deferred annuities, which provide for an initial deposit by the owner.
Flexible premium products also provide for optional additional deposits, the
time and amount of which are at the discretion of the owner. Standard Life
credits the account of the owner with earnings at interest rates that are
revised periodically until the maturity date. This accumulated value is tax
deferred. Revisions to interest rates on deferred annuities are restricted by
an initial crediting rate guaranteed for a specific period of time, usually one
year, and a minimum crediting rate guaranteed for the term of the deferred
annuity, which is typically 3%. At maturity, the owner can elect a lump sum
cash payment of the accumulated value or one of the various payout options
available. Standard Lifes deferred annuities also typically provide for
penalty-free partial withdrawals of up to 10% annually of the accumulation
value after the owner has held the deferred annuity for more than 12 months. In
addition, the owner may surrender the deferred annuity at any time before the
maturity date and receive the accumulated value, less any surrender charge then
in effect for that contract. To protect holders of deferred annuities from a
sharp reduction in the credited interest rate after a deferred annuity is
issued, Standard Life permits the deferred annuity holder of certain annuities
to surrender the annuity during a specified period without incurring a
surrender charge if the renewal-crediting rate is below a stated level. This
stated level of interest is referred to as the bail-out rate and is typically
below the original crediting rate, but above the minimum guaranteed crediting
rate. Certain products also contain a market value adjustment feature, whereby
a policyholders surrender value is adjusted for changes in the interest rate
environment. This feature protects us against the risk of policyholder
surrender when asset values are depressed.

As of January 1, 2003, the crediting rates available on Standard Lifes
currently marketed deferred annuities ranged from 3.0% to 7.55% with most new
issues having an interest rate with a one-year guarantee period. A series of
annuity products introduced in 2000 have their interest rate guaranteed for an
initial period of 5 to 10 years. After the initial period, the crediting rate
may be changed periodically, subject to a minimum guaranteed rate of 3.0%. As
of January 1, 2003, interest crediting rates after the initial guarantee period
ranged from 3.0% to 5.25%. The surrender charge is initially 7% to 15% of the
contract value depending on the product and decreases over the applicable
surrender charge period of 5 to 13 years. Certain currently marketed products
carry a bailout rate for the first 2 to 5 years after issuance; as of January
1, 2003, the bailout rate for such products ranged from 3.0% to 4.5%. As of
December 31, 2002, Standard Life had 14,926 currently marketed deferred annuity
contracts in force.

Equity-indexed Annuities.In response to consumers desire for
alternative investment products with returns linked to common stocks, Standard
Life introduced a line of equity-indexed annuity products in 1998. The
annuitys contract value is equal to the premium paid, increased for returns
based on the change in the Standard & Poors 500 Index (S&P 500 Index) and/or
the Dow Jones Industrial Average Index (DJIA). Standard Lifes equity-indexed
annuities apply index credits to policyholders annually, so that a given years
equity credits are locked in, and cannot be reduced by future declines in the
index. Two basic index crediting methods are used for Standard Lifes
equity-indexed annuities, participation rate crediting and spread/cap
crediting. For participation rate products, a percentage (the participation
rate) of the change in the index accrues to the contract value. For spread/cap
products, increases in the index up to the spread amount do not accrue to the
contract value, but above the spread, the contract is credited the full amount
of the increase in the index up to the limit of the cap. Standard Life has the
discretionary ability to annually change the participation rates and
spreads/caps on its products. The minimum guaranteed values are equal to
between 75% and 85% of first year premiums and between 87.5% and 90% of renewal
premiums collected for equity-indexed annuities, plus interest credited at an
annual rate of 3%. The annuities provide for penalty-free withdrawals of up to
10% in each year after the first year of the annuitys term. Other withdrawals
from the product are subject to a surrender charge. Standard Life purchases
S&Ps 500 Index or DJIA Index Call Options to hedge potential increases to
policyholder benefits resulting from increases in the Index to which the
products return is linked. As of December 31, 2002, Standard Life had 7,726
currently marketed equity-indexed contracts in force.

Single Premium Immediate Annuities.Standard Life offers single premium
immediate annuities, which are purchased with a one time premium deposit at the
time of issuance. In exchange for a one time premium deposit, Standard Life
begins an agreed upon payout stream shortly after issuance of the contract
consisting of principal plus accumulated interest credited to the annuity.
Payout is guaranteed for the term of the contract. A new single premium
immediate annuity product was introduced in 2000, which resulted in a
significant increase in sales for 2000, 2001, and 2002. As of December 31,
2002, Standard Life had 3,565 currently marketed single premium immediate
annuity contracts in force.

Other Domestic Product Information.Annuity sales increased in 2002
primarily due to greater productivity per agent and an expanded geographic
presence.

Individual annuity sales within the United States have nearly tripled from
$54 billion in 1990 to more than $141 billion in 2001, according to the
American Council of Life Insurers. The individual annuity market, which is one
of our primary targets, comprises virtually all of our domestic sales and 95%
and 80% of total sales in 2002 and 2001, respectively.

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As the 76 million baby boomers born from 1946 through 1964 grow older,
demand for insurance products is expected to grow. We believe that those
seeking adequate retirement incomes will become less dependent on Social
Security and their employers retirement programs and more dependent upon their
own financial resources. Annuities currently enjoy an advantage over certain
other saving mechanisms because the annuitant receives a tax-deferred accrual
of interest on the investment during the accumulation period.

Our gross domestic sale percentages by U.S. geographical region are summarized
as follows:

|                     |  |      |     |      |  |      |     |   |  |  |     |  
|-------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|State                |  | 2002 |     | 2001 |  | 2000
|                     |  |      |     |      |  |     
|Michigan             |  |      | 17  | %    |  |      | 5   | % |  |  | 4   | %
|California           |  |      | 15  |      |  |      | 21  |   |  |  | 15  |  
|Florida              |  |      | 15  |      |  |      | 11  |   |  |  | 9   |  
|Indiana              |  |      | 14  |      |  |      | 18  |   |  |  | 19  |  
|Ohio                 |  |      | 6   |      |  |      | 7   |   |  |  | 9   |  
|North Carolina       |  |      | 5   |      |  |      | 5   |   |  |  | 6   |  
|Illinois             |  |      | 5   |      |  |      | 2   |   |  |  | 3   |  
|Wisconsin            |  |      | 4   |      |  |      | 5   |   |  |  | 4   |  
|All other states (1) |  |      | 19  |      |  |      | 26  |   |  |  | 31  |  
|                     |  |      |     |      |  |      |     |   |  |  |     |  
|Total                |  |      | 100 | %    |  |      | 100 | % |  |  | 100 | %
|                     |  |      |     |      |  |      |     |   |  |  |     |  



---

|(1) |  | No other state had gross sales greater than 4% in 2002.
|--- |  | -------------------------------------------------------

Former Products (Closed Blocks)

We also generate cash flow and income from our closed blocks of in force
life insurance and annuities. Closed blocks consist of in force life insurance
and annuities that are not currently being marketed. The closed block
designation does not have legal or regulatory significance and there are no
restrictions on their assets or future profits. The premiums received on the
closed blocks are primarily from the ordinary and universal life business.
Closed block premiums typically decline over extended periods of time as a
result of policy lapses, surrenders and expiries.

Annuities.Our closed blocks of deferred annuities consist primarily of
flexible premium deferred annuities and a small amount of single premium
deferred annuities, which, unlike flexible premium deferred annuities, do not
provide for additional deposits. As of January 1, 2003, these deferred
annuities had crediting rates ranging from 3.0% to 5.5% and guaranteed minimum
crediting rates ranging from 3.0% to 5.5%. The crediting rate may be changed
periodically. The contract owner is permitted to withdraw all or part of the
accumulation value. Our closed blocks of annuities include payout annuities
which consist of annuities in which benefits are paid out over a specified time
period. Payout annuities cannot be terminated by surrender or withdrawal.
Interest rates used in determining payout annuities range from 3.0% to 7.0% and
cannot be changed. At December 31, 2002, we had 11,977 annuity contracts in
force for closed blocks.

Traditional Life.Our closed blocks of traditional life business include
several types of participating and non-participating, whole life and term life
insurance policies. Face amounts vary, but retained death benefits are $150,000
or less per life. Traditional life insurance products involve fixed premium
payments made over time, with the stated death benefit paid in full upon the
death of the insured. The whole life policy combines the death benefit with a
forced savings plan. Premiums remain level over the life of the policy, with
the policyholder prefunding during the early years of coverage when risk of
death is low. Over time, whole life policies begin to accrue a cash value,
which can be made available to the policyholder net of taxes and withdrawal
penalties. The term policy provides benefits only as long as premiums are
paid. At December 31, 2002, we had 40,009 traditional life policies in force
for closed blocks.

Universal Life.Our closed blocks of universal life business include
flexible premium universal life policies which provide for periodic deposits,
interest credits to account values and charges to the account values for
mortality and administrative costs. As of January 1, 2003, the interest rate
on existing flexible premium universal life policies was 4% to 5% with a
guaranteed interest rate of 4.0% to 5.0%. At December 31, 2002, we had 10,782
universal life policies in force for closed blocks.

Former International Products (Discontinued operations)

Unit-linked Assurance Products.Standard Management International wrote
unit-linked assurance products, which are similar to U.S. produced variable
life products. Separate account assets and liabilities were maintained
primarily for the exclusive benefit of these contracts, where benefits on
surrender and maturity are not guaranteed. They generally represent

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funds held in accounts to meet specific investment objectives of
policyholders who bear the investment risk. Products include 1) single premium
unit-linked contracts, with publicly traded investment options, 2) annual
premium unit-linked contracts, with publicly traded investment options and 3)
personal portfolio contracts, which include private stock and limited market
investment options. Investment income and investment gains and losses within
the separate accounts accrue directly to the policyholders. The fees received
by Standard Management International for administrative and contract holder
maintenance services performed for these separate accounts are included in our
Consolidated Statement of Operations. Mortality risk on these products is
minimal.

In the past Standard Management International also sold non-linked
investment contracts, universal life policies, and to a lesser extent,
traditional life policies. The investment contracts are mainly short-term
single premium endowments or payout annuities under which fixed benefits are
paid to the policyholder. The universal life contracts are mainly regular
premium and single premium endowment. The benefits payable to the policyholders
are directly linked to the investment performance of the underlying assets.
Non-linked products represent less than 2% of Standard Management
Internationals product liabilities.

Other International Product Information.The decrease in deposits from
unit-linked products in 2002 was primarily due to the sale of the International
Operations in 2002.

See Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations  Product Profitability.

Operations

Our principal administrative departments for our insurance subsidiaries
include financial, new business and policyholder services, and information
technology services (IT) departments. The financial department provides
accounting, budgeting, tax, investment, financial reporting and actuarial
services and establishes cost control systems. The new business department
reviews policy applications, and issues and administers our policies. The
policyholder services department authorizes disbursements related to claims and
surrenders. The IT department oversees and administers our information
processing systems.

Our administrative departments use a common integrated policy
administration system that permits efficiency and cost control. Our IT system
services approximately 92,000 active policies at December 31, 2002.

Underwriting

Premiums charged on life insurance products are based in part on
assumptions about the incidence and timing of insurance claims. When we issued
life insurance business, we adopted and followed underwriting procedures for
traditional and universal life insurance policies. Life insurance does not
allow for underwriting after a policy is issued. Since we no longer issue new
life insurance policies, life insurance underwriting activities are minimal and
occur only when a policyholder requests a change which is subject to
underwriting. Underwriting with respect to annuities is minimal.

Traditional underwriting procedures are not applied to policies acquired
in blocks. In these cases, we review the mortality experience for recent years
and compare actual experience to that assumed in the actuarial projections for
the acquired policies.

Investments

Investment activities are an integral part of our business as the
investment income of our insurance subsidiaries is a significant part of total
revenues. Profitability is significantly affected by spreads between interest
earned on invested assets and rates credited on insurance liabilities.
Substantially all credited rates on deferred annuities may be changed at least
annually. For the year ended December 31, 2002, the weighted average net yield
of our investment portfolio was 6.53% and the weighted average interest rate
credited on our interest-sensitive liability portfolio, excluding liabilities
related to separate accounts and equity indexed annuities, was approximately
4.46% per annum for an average investment spread of 207 basis points at
December 31, 2002, compared to 240 basis points at December 31, 2001. The
decline in the investment spread is primarily driven by the impact and
significance of our 2002 annuity deposits and by the impact of realized
investment losses. Annuity deposits received in 2002 were invested during a
rapidly declining interest rate environment, resulting in reduced earned rates
on new investments and on the asset portfolio as a whole. In this environment,
we were unable to adjust crediting rates quickly enough, on both new sales and
renewal business, to maintain prior year spreads. In addition, realized
investment gains and losses resulted in reduced investment income during 2002.
Future increases or decreases in interest

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rates may increase or decrease the average interest rate spread between
investment yields and interest rates credited on insurance liabilities, which
in turn may have a beneficial or adverse effect on our future profitability.
Sales of fixed maturity securities that result in investment gains may also
tend to decrease future average interest rate spreads. State insurance laws and
regulations prescribe the types of permitted investments and limit their
concentration in certain classes of investments.

We balance the duration of our invested assets with the expected duration
of benefit payments arising from insurance liabilities. The duration of a
security is a measure of a securitys price sensitivity to changes in market
interest rates. The option-adjusted duration of fixed maturity securities and
short-term investments for our U.S. insurance subsidiaries was 3.9 and 5.1 at
December 31, 2002 and 2001, respectively.

Our investment strategy is guided by strategic objectives established by
the Investment Committee of the Board of Directors. Our major investment
objectives are to: 1) maximize book investment income without exposing surplus
to excessive volatility, 2) match the anticipated duration of investments with
the anticipated duration of policy liabilities through our asset-liability cash
flow management process, 3) maximize our company objectives for tax
considerations and realized gain/loss recognition, and 4) provide sufficient
liquidity to meet cash requirements with minimum sacrifice of investment yield.
Consistent with this strategy, we invest primarily in securities of the U.S.
government and its agencies, investment grade utilities, corporate debt
securities and collateralized mortgage obligations. When opportunities arise,
below investment grade securities may be purchased; however, protection against
default risk is a primary consideration. We will not invest more than 7% of our
bond portfolio in below investment grade securities.

The National Association of Insurance Commissioners (NAIC) assigns
quality ratings to securities called NAIC Designations which are used by
insurers when preparing their annual statements. The NAIC assigns ratings to
publicly traded and privately-placed securities. The ratings assigned range
from Class 1 to Class 6, with a rating in Class 1 being of the highest quality.
The following table sets forth the quality of our fixed maturity securities as
of December 31, 2002, classified in accordance with the ratings assigned by the
NAIC:

|                       |       |                     |                  |     |  
|---------------------- | ----- | ------------------- | ---------------- | --- | -
|                       |       |                     | Percent of Fixed
|NAIC
Rating            |       | Maturity Securities
|                       |       |                    
|1                      |       |                     | 64               |    
|2                      |       |                     | 33               |    
|                       |       |                     |                  |    
|Total Investment Grade |       |                     | 97               |    
|3-4                    |       |                     | 2                |    
|5-6                    |       |                     | 1                |    
|                       |       |                     |                  |    
|                       | Total |                     |                  | 100 | %
|                       |       |                     |                  |    

Deutsche Investment Management Americas Inc. manages our domestic fixed
maturity securities, subject to the direction of our Investment Committee.

Approximately 46% of our fixed maturity securities at December 31, 2002
are comprised of mortgage-backed securities that include collateralized
mortgage obligations and mortgage-backed pass-through securities. Approximately
34% of the book value of mortgage-backed securities in our portfolio are backed
by the full faith and credit of the U.S. government as to the full amount of
both principal and interest and 38% are backed by an agency of the U.S.
government (although not by the full faith and credit of the U.S. government).
We closely monitor the market value of all investments within our
mortgage-backed portfolio.

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The following table summarizes our mortgage-backed securities at December 31,
2002 (in thousands):

|                                                     |                                         |                                  |         |           |         |            |      |       |      |            |         |            |         |          |      |           |      |      |     |           |     |      |      |      |      | 
|---------------------------------------------------- | --------------------------------------- | -------------------------------- | ------- | --------- | ------- | ---------- | ---- | ----- | ---- | ---------- | ------- | ---------- | ------- | -------- | ---- | --------- | ---- | ---- | --- | --------- | --- | ---- | ---- | ---- | ---- | 
|                                                     |                                         |                                  |         |           |         |            |      |       |      |            |         |            |         |          |      |           |      |      |     | Estimated |     | Avg.
|                                                     |                                         |                                  |         |           |         |            |      | % of  |      |            |         |            |         | % of     |      | Avg. Life |      | Term
|                                                     |                                         |                                  |         | Amortized |         | Fixed      |      | Fair  |      | Fixed      |         | of         |         | to Final
|                                                     |                                         |                                  |         | Cost      |         | Maturities |      | Value |      | Maturities |         | Investment |         | Maturity
|                                                     |                                         |                                  |         |           |         |            |      |       |      |            |        
|                                                     |                                         |                                  |         |           |         |            |      |       |      | (In Years) |         | (In Years)
|Agency collateralized mortgage
obligations:          |                                         |                                  |         |           |         |            |      |       |      |           
|Planned and target amortization classes              |                                         | $                                | 55,748  |           |         |            | 4.1  | %     |      | $          | 57,350  |            |         |          | 4.3  | %         |      |      | 5.6 |           |     |      | 18.0 |     
|Sequential and support classes                       |                                         |                                  | 5,928   |           |         |            | 0.4  | %     |      |            | 6,059   |            |         |          | 0.4  | %         |      |      | 5.4 |           |     |      | 29.8 |     
|                                                     |                                         |                                  |         |           |         |            |      |       |      |            |         |            |         |          |      |           |      |      |     |           |     |      |      |     
|                                                     |                                         | Total                            |         |           | 61,676  |            |      |       | 4.5  | %          |         |            | 63,409  |          |      |           | 4.7  | %    |     |           | 5.6 |      |      |      | 19.1 | 
|Non-agency collateralized mortgage
obligations:      |                                         |                                  |         |           |         |            |      |       |      |            |         |            |         |          |      |           |      |      |     |           |     |      |      |     
|                                                     | Planned and target amortization classes |                                  |         | 492       |         |            |      | 0.0   | %    |            |         | 513        |         |          |      | 0.0       | %    |      |     | 1.4       |     |      |      | 21.5 |     
|                                                     | Sequential classes                      |                                  |         | 55,985    |         |            |      | 4.1   | %    |            |         | 58,160     |         |          |      | 4.2       | %    |      |     | 4.1       |     |      |      | 26.4 |     
|                                                     | Other                                   |                                  |         | 80,174    |         |            |      | 5.9   | %    |            |         | 82,335     |         |          |      | 6.1       | %    |      |     | 6.0       |     |      |      | 18.2 |     
|                                                     |                                         |                                  |         |           |         |            |      |       |      |            |         |            |         |          |      |           |      |      |     |           |     |      |      |     
|                                                     |                                         | Total                            |         |           | 136,651 |            |      |       | 10.0 | %          |         |            | 141,008 |          |      |           | 10.3 | %    |     |           | 5.2 |      |      |      | 21.6 | 
|                                                     |                                         |                                  |         |           |         |            |      |       |      |            |         |            |         |          |      |           |      |      |     |           |     |      |      |     
|Total CMOs                                          |                                         |                                  | 198,327 |           |         |            | 14.5 | %     |      |            | 204,417 |            |         |          | 15.0 | %         |      |      | 5.3 |           |     |      | 20.8 |     
|                                                     |                                         |                                  |         |           |         |            |      |       |      |            |         |            |         |          |      |           |      |      |     |           |     |      |      |     
|Non agency collateralized
mortgage-backed securities |                                         |                                  | 2,255   |           |         |            | 0.2  | %     |      |            | 2,541   |            |         |          | 0.2  | %         |      |      | 3.3 |           |     |      | 22.2 |     
|Agency mortgage-backed pass-through
securities       |                                         |                                  | 432,000 |           |         |            | 31.6 | %     |      |            | 444,074 |            |         |          | 32.8 | %         |      |      | 5.0 |           |     |      | 25.0 |     
|                                                     |                                         |                                  |         |           |         |            |      |       |      |            |         |            |         |          |      |           |      |      |     |           |     |      |      |     
|                                                     |                                         | Total mortgage-backed securities |         | $         | 632,582 |            |      |       | 46.3 | %          |         | $          | 651,032 |          |      |           | 48.0 | %    |     |           | 5.1 |      |      |      | 23.7 | 
|                                                     |                                         |                                  |         |           |         |            |      |       |      |            |         |            |         |          |      |           |      |      |     |           |     |      |      |     

The fair values for mortgage-backed securities were determined from
broker-dealer markets, internally developed methods and nationally recognized
statistical rating organizations.

Certain mortgage-backed securities are subject to significant prepayment
risk, since, in periods of declining interest rates, mortgages may be repaid
more rapidly than scheduled as individuals refinance higher rate mortgages to
take advantage of the lower current rates. As a result, holders of
mortgage-backed securities may receive large prepayments on their investment,
which cannot be reinvested at an interest rate comparable to the rate on the
prepaying mortgages. Planned and target amortization class securities are
designed to amortize in a more predictable manner by shifting the primary risk
of prepayment of the underlying collateral to investors in other tranches
(support classes). Mortgage-backed pass-through securities, sequential and
support class collateralized mortgage obligations, which comprised the
remaining 91% of the book value of our mortgage-backed securities at December
31, 2002, are more sensitive to prepayment risk.

Reserves

Our insurance subsidiaries have established and carry as liabilities in
their financial statements actuarially determined liabilities to satisfy their
respective annuity contract and life insurance policy obligations.

Insurance policy liabilities for deferred annuities, universal life
policies and international unit-linked products are equal to the full account
value that accrues to the policyholder (cumulative premiums less certain
charges, plus interest credited) with credited interest rates ranging from 3.0%
to 11.5% in 2002 and 3.0% to 12.5% in 2001.

Insurance policy liabilities for equity-indexed annuity products are
computed in accordance with Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133), and consist of a book value liability for benefits guaranteed in the
contract, combined with a market value liability for equity-linked benefits of
the contract.

We perform periodic studies to compare current experience for mortality,
interest and lapse rates with projected experience used in calculating the
deferred annuity and universal life insurance policy liabilities. Differences
are reflected currently in earnings for each period. Historically, we have not
experienced significant adverse deviations from our assumptions.

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Insurance policy liabilities for traditional life insurance contracts are
computed using the net level premium method on the basis of assumed investment
yields, mortality and withdrawals, which were appropriate at the time the
policies were issued. Assumed investment yields are based on interest rates
ranging from 6.2% to 7.5%. Mortality is based upon various actuarial tables,
principally the 1965-1970 or the 1975-1980 Select and Ultimate Table.
Withdrawals are based upon our experience and vary by issue age, type of
coverage, and duration.

Reinsurance

Consistent with the general practice of the life insurance industry, we
have reinsured portions of the coverage provided by our insurance products with
other insurance companies under agreements of indemnity reinsurance. Our
policy risk retention limit on the life of any one individual does not exceed
$150,000.

Indemnity reinsurance agreements are intended to limit a life insurers
maximum loss on a particular risk or to obtain a greater diversification of
risk. Indemnity reinsurance does not discharge the primary liability of the
original insurer to the insured, but it is the practice of insurers for
statutory accounting purposes (subject to certain limitations of state
insurance statutes) to account for risks which have been reinsured with other
approved companies, to the extent of the reinsurance, as though they are not
risks for which the original insurer is liable. However, under Statement of
Financial Accounting Standards No. 113 (SFAS 113), Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts, these amounts
are added back to policy reserves and recorded as amounts due from reinsurers.

Reinsurance ceded on life insurance policies to unaffiliated companies in
2002, 2001 and 2000, excluding financial reinsurance agreements, represented
49.9%, 49.4% and 45.3%, respectively, of our gross combined individual life
insurance in force at the end of such years. Reinsurance assumed in the normal
course from unaffiliated companies in 2002, 2001 and 2000 represented 11.8%,
11.0% and 8.7%, respectively, of our net combined individual life insurance in
force.

The following is reinsurance ceded information for our in force life
insurance policies at December 31, 2002 (in thousands):

|                                            |  |               |         |             |  |             |      |   |  |   |       | 
|------------------------------------------- |  | ------------- | ------- | ----------- |  | ----------- | ---- | - |  | - | ----- | 
|                                            |  |               |         |             |  | % of Total  |      |   |  |  
|                                            |  | Face Value of |         | Reinsurance |  | Reinsurance
|Insurance Company                           |  | Life Policies |         | Ceded       |  | Recoverable
|                                            |  |               |         |             |  |            
|Employers Reinsurance
Corporation           |  | $             | 158,781 |             |  |             | 29.2 | % |  | $ | 1,198 | 
|Lincoln National Life
Insurance Company     |  |               | 99,072  |             |  |             | 18.2 | % |  |   | 1,150 | 
|Business Mens
Assurance Company of
America |  |               | 81,282  |             |  |             | 14.9 | % |  |   | 401   | 
|Park Avenue Life
Insurance Company          |  |               | 31,488  |             |  |             | 5.8  | % |  |   | 3,629 | 

Reinsured life insurance in force at December 31, 2002 is ceded to
insurers rated A (Excellent) or better by A.M. Best. Historically, we have
not experienced material losses in collection of reinsurance receivables.

Our largest annuity reinsurer at December 31, 2002, SCOR Life U.S.
Insurance Company (SCOR Life), represented $20.1 million, or 52% of our total
reinsurance recoverable and is rated A- (Excellent) by A.M. Best. SCOR Life
limits dividends by Standard Life to Standard Management or affiliated
companies if its adjusted surplus is less than 5.5% of admitted assets or $78.9
million at December 31, 2002.

Admitted assets are defined by the NAIC as probable future economic
benefits obtained or controlled by a particular entity as a result of past
transactions or events which may be included in an insurance companys balance
sheet. Some assets or portions of assets may be considered nonadmitted
because they do not conform to the laws and regulations of various states.
Therefore, certain assets which normally would be accorded value in
noninsurance corporations are accorded no value and thus reduce the reported
surplus of the insurance company.

Standard Lifes adjusted surplus was $59.3 million on December 31, 2002,
therefore, SCOR Lifes approval will be required prior to the payment of
dividends to Standard Management in 2003.

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Acquisition Strategy, Recent Acquisitions and Divestiture

Acquisition Strategy

A principal component of our strategy prior to 1999 was to grow through
the acquisition of life insurance companies and blocks of in force life
insurance and annuities. Although our focus has been on internal organic growth
since 1999, we regularly investigate acquisition opportunities in the life
insurance industry that complement or are otherwise strategically consistent
with our existing business. Any decision to acquire a block of business or an
insurance company will depend on a favorable evaluation of various factors. We
believe that availability of blocks of business in the marketplace will
continue in response to ongoing industry consolidation, risk-based capital
requirements and other regulatory and rating agency concerns. We currently have
no plans or commitments to acquire any specific insurance business or other
material assets.

We have information systems and administrative capabilities necessary to
add additional blocks of business without a proportional increase in operating
expenses. In addition, we have developed management techniques for reducing or
eliminating the expenses of the companies we acquire through the consolidation
of their operations. Such techniques include reduction or elimination of
overhead, including the acquired companys management, staff and home office,
elimination of marketing expenses and, where appropriate, the substitution of
Standard Lifes distribution network for the acquired companys current
distribution system, and the conversion of the acquired companys data
processing operations to our system.

We typically acquire companies or blocks of business through the purchase
or exchange of shares. This method is also used for assumption reinsurance
transactions. Any future acquisitions may be subject to certain regulatory
approvals, policyholder consents and stockholder approval.

In 2002, our acquisition strategy included acquiring companies to
distribute retail and third party reimbursed products and services. See
Recent Acquisitions below.

In addition, in 2002, we capitalized on our previous investment by selling
our International Operations which allowed us to not only create a new
subsidiary, U.S. Health Services, but also to fund current growth in our
domestic insurance operations.

Recent Acquisitions

During 2002, we acquired, for cash, the pharmaceutical business of HomeMed
Channel, Inc. and PCA, LLC. In addition, in December 2002, we purchased assets
of Prescriptions by Mail, Inc., which was financed primarily by a promissory
note. All three acquisitions were accounted for under the purchase method of
accounting. In 2002, U.S. Health Services, a wholly owned subsidiary of
Standard Management Corporation, was formed to distribute retail and third
party reimbursed products and services through direct to consumer as well as
institutional channels.

Divestiture

In 2002, we sold the International Operations which consisted of 100% of
the shares in Premier Life (Luxembourg) and the portfolio of Premier Life
(Bermuda) to Winterthur Life, a division of Credit Suisse Group, resulting in a
gain from the sale of discontinued operations of $6.9 million. With the net
proceeds received from the sale, we made a $15 million capital contribution to
Standard Life, repaid $3.75 million in debt, and retained the remaining $6.25
million for general corporate purposes.

Competition

The life insurance industry is highly competitive and consists of a large
number of both stock and mutual insurance companies, many of which have
substantially greater financial resources, broader and more diversified product
lines and larger staffs than those possessed by Standard Management. According
to the American Council of Life Insurers, there were approximately 1,225 life
insurance companies in the United States, which may offer insurance products
similar to ours. Competition within the life insurance industry occurs on the
basis of, among other things, 1) product features such as price and interest
rates, 2) perceived financial stability of the insurer, 3) policyholder
service, 4) name recognition and 5) ratings assigned by insurance rating
organizations.

We must also compete with other insurers to attract and retain the
allegiance of agents. We believe that competition centers more on the strength
of the agent relationship rather than on the insurers name recognition to the
customer. We offer

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competitive products, competitive commission structures, internet based
agent services, prompt policy issuance and responsive policyholder service and
believe we are successful in attracting and retaining agents.

Competition also is encountered from the expanding number of banks,
securities brokerage firms and other financial intermediaries which are
marketing insurance products and which offer competing products such as savings
accounts and securities. We began distributing annuities through financial
institutions as a result of the acquisition of Savers Marketing in March 1998.
The passage, by Congress, of the Gramm-Leach-Bliley Financial Services
Modernization Act (GLB Act) has expanded competitive opportunities for
non-insurance financial services companies.

Financial institutions, marketing companies, agents who market insurance
products and policyholders use the ratings of an insurer as one factor in
determining which insurers annuity to market or purchase. Standard Life and
Dixie Life have a rating of B+ and B, respectively, by A.M. Best. A rating
of B+ is assigned by A.M. Best to companies that, in their opinion, have
achieved very good overall performance when compared to the standards
established by A.M. Best, and have a good ability to meet their obligations to
policyholders over a long period of time. A rating of B is assigned by A.M.
Best to companies that, in their opinion, have achieved good overall
performance when compared to the standards established by A.M. Best. According
to A.M. Best, these companies generally have an adequate ability to meet their
obligations to policyholders, but their financial strength is vulnerable to
unfavorable changes in underwriting or economic conditions. In evaluating a
companys financial and operating performance, A.M. Best reviews the companys
profitability, leverage and liquidity as well as the companys book of
business, the adequacy and soundness of its reinsurance, the quality and
estimated market value of its assets, the adequacy of its reserves and the
experience and competence of its management. A.M. Bests ratings are based upon
factors relevant to policyholders, agents, insurance brokers and intermediaries
and are not directed to the protection of investors. Generally, rating agencies
base their ratings on information furnished to them by the issuer and on their
own investigations, studies and assumptions by the rating agencies. There is no
assurance that any particular rating will continue for any given period of time
or that it will not be changed or withdrawn entirely if, in the judgment of the
rating agency, circumstances so warrant. Although a higher rating by A.M. Best
or another insurance rating organization could have a favorable effect on
Standard Lifes business, management believes that it is able to compete on the
basis of their competitive crediting rates, asset quality, strong relations
with its independent agents and the quality of service to its policyholders.

The pharmaceutical industry is highly competitive, both regionally and
nationally. We must compete with other retail pharmacies and national mail
order/internet pharmacies, which distribute prescription and non-prescription
(over the counter) products. We believe we offer pharmaceutical products at
competitive prices with prompt service and are successful in maintaining
customer satisfaction.

Federal Income Taxation

We file a consolidated return with our non insurance subsidiaries for
federal income tax purposes, and beginning January 1, 2001 with our insurance
subsidiaries, Standard Life and Dixie Life. At December 31, 2002, we have a net
capital loss carryforward of approximately $2.2 million, which expires in 2006.

Effective January 1, 2000, we entered into a tax sharing agreement with
Savers Marketing and Standard Management International that allocates the
consolidated federal income tax liability. In 2002, Savers Marketing paid $.1
million and Standard Management International paid $.6 million in accordance
with this agreement. In 2001, Savers Marketing paid $.4 million and Standard
Management International recovered $.1 million in accordance with this
agreement. Standard Management International terminated its participation in
this agreement with the sale of our International Operations.

The products marketed and issued by Standard Life generally provide the
policyholder with an income tax advantage, as compared to other saving
investments such as certificates of deposit and bonds, in that income taxation
on the increase in value of the product is deferred until receipt by the
policyholder. With other savings investments, the increase in value is taxed as
earned. Life insurance benefits that accrue prior to the death of the
policyholder, and annuity benefits, are generally not taxable until paid, and
life insurance death benefits are generally exempt from income tax. The tax
advantage for life insurance and annuity products is provided in the Internal
Revenue Code of 1986, as amended, and is generally followed in all states and
other U.S. taxing jurisdictions. Accordingly, it is subject to change by
Congress and the legislatures of the respective taxing jurisdictions.

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Inflation

A primary direct effect of inflation is an increase to our operating
expenses. A large portion of our operating expenses consists of salaries, which
are subject to wage increases at least partly affected by the rate of
inflation.

The rate of inflation also affects us indirectly. To the extent that the
governments economic policy to control the level of inflation results in
changes in our interest rates, our new sales of annuity products, investment
income and withdrawal rates are affected. Changes in the level of interest
rates also have an effect on interest spreads, as investment earnings are
reinvested.

Regulatory Factors

Our insurance subsidiaries are subject to significant regulation by the
insurance regulatory authorities in the jurisdictions in which they are
domiciled and the insurance regulatory bodies in the other jurisdictions in
which they are licensed to sell insurance. The purpose of such regulation is
primarily to ensure the financial stability of insurance companies and to
provide safeguards for policyholders rather than to protect the interest of
stockholders or debtholders. The insurance laws of various jurisdictions
establish regulatory agencies with broad administrative powers relating to 1)
the licensing of insurers and their agents, 2) the regulation of trade
practices, 3) management agreements, 4) the types of permitted investments and
maximum concentration, 5) deposits of securities, 6) the form and content of
financial statements, 7) premiums charged by insurance companies, 8) sales
literature and insurance policies, 9) accounting practices and the maintenance
of specified reserves and 10) capital and surplus. Our insurance subsidiaries
are required to file detailed periodic financial reports with supervisory
agencies in certain jurisdictions.

Most states have also enacted legislation regulating insurance holding
company activities including acquisitions, extraordinary dividends, terms of
surplus debentures, terms of affiliate transactions and other related matters.
The insurance holding company laws and regulations vary by state, but generally
require an insurance holding company and its insurance company subsidiaries
licensed to do business in the state to register and file certain reports with
the regulatory authorities, including information concerning capital structure,
ownership, financial condition, certain intercompany transactions and general
business operations. State holding company laws also require prior notice or
regulatory agency approval of certain material intercompany transfers of assets
within the holding company structure. Recently a number of state regulators
have considered or have enacted legislative proposals that change, and in many
cases increase, the authority of state agencies to regulate insurance companies
and holding companies. For additional information on state laws regulating
insurance company subsidiaries, see Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital
Resources and Note 12 to our Consolidated Financial Statements.

Under Indiana insurance law, Standard Life may not enter into certain
transactions, including management agreements and service contracts, with
members of its insurance holding company system, including Standard Management,
unless Standard Life has notified the Indiana Department of Insurance of its
intention to enter into these transactions and the Indiana Department of
Insurance has not disapproved of them within the period specified by Indiana
law. Among other things, these transactions are subject to the requirement that
their terms and charges or fees for services performed be fair and reasonable.

The Indiana insurance laws and regulations require that the statutory
surplus of Standard Life following any dividend or distribution be reasonable
in relation to its outstanding liabilities and adequate to its financial needs.
The Indiana Department of Insurance may bring an action to enjoin or rescind
the payment of a dividend or distribution by Standard Life that would cause its
statutory surplus to be unreasonable or inadequate under this requirement.

Most states, including Indiana, require administrative approval of the
acquisition of 10% or more of the outstanding shares of an insurance company
incorporated in the state or the acquisition of 10% or more of the outstanding
shares of an insurance holding company whose insurance subsidiary is
incorporated in the state. The request for approval must be accompanied by
detailed information concerning the acquiring parties and the plan of
acquisition. The acquisition of 10% of these shares is generally deemed to be
the acquisition of control for the purpose of the holding company statutes.
However, in many states the insurance authorities may find that control in
fact does or does not exist in circumstances in which a person owns or controls
either a lesser or a greater amount of securities.

In some instances state regulatory authorities require deposits of assets
for the protection of either policyholders in those states or for all
policyholders. At December 31, 2002, securities of $10.5 million or
approximately .75% of the book value of our U.S. insurance subsidiaries
invested assets were on deposit with various state treasurers or custodians.
These deposits must consist of securities that comply with the standards that
the particular state has established.

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In recent years, NAIC, and state insurance regulators have examined
existing laws and regulations and their application to insurance companies.
This examination has focused on 1) insurance company investment and solvency
issues, 2) risk-based capital guidelines, 3) assumption reinsurance, 4)
interpretations of existing laws, 5) the development of new laws, 6) the
interpretation of non-statutory guidelines, 7) the standardization of statutory
accounting rules and 8) the circumstances under which dividends may be paid.
The NAIC has encouraged states to adopt model NAIC laws on specific topics such
as holding company regulations and the definition of extraordinary dividends.
We are unable to predict the future impact of changing state regulation on our
operations.

The NAIC, as well as Indiana and Mississippi, have each adopted Risk-Based
Capital (RBC) requirements for life and health insurance companies to
evaluate the adequacy of statutory capital and surplus in relation to
investment and insurance risks. State insurance regulators use the RBC
requirements as regulatory tools only, which aid in the identification of
insurance companies that could potentially lack sufficient capital. Regulatory
compliance is determined by a ratio (the RBC Ratio) of the companys
regulatory total adjusted capital to its authorized control level RBC. The two
components of the RBC Ratio are defined by the NAIC. The RBC ratios that
require corrective action are as follows:

|                   |  |               |  |                                                              
|------------------ |  | ------------- |  | -------------------------------------------------------------
|Level              |  | RBC Ratio     |  | Corrective Action                                            
|                   |  |               |  |                                                              
|Company Action     |  | 1.5  2       |  | Company is required to submit a plan
to improve its RBC Ratio
|Regulatory Action  |  | 1  1.5       |  | Regulators will order corrective actions                     
|Authorized Control |  | 0.7  1       |  | Regulators are authorized to take
control of the company     
|Mandatory Control  |  | less than 0.7 |  | Regulators must take over the company                        

At December 31, 2002, the RBC Ratios of Standard Life and Dixie Life were
both at least one and a half times greater than the levels at which company
action is required. If these RBC Ratios should decline in the future, our
subsidiaries might be subject to increased regulatory supervision and decreased
ability to pay dividends, management fees and surplus debenture interest to
Standard Management.

On the basis of annual statutory statements filed with state regulators,
the NAIC calculates 12 financial ratios to assist state regulators in
monitoring the financial condition of insurance companies. A usual range of
results for each ratio is used as a benchmark. In the past, variances in
certain ratios of our insurance subsidiaries have resulted in inquiries from
insurance departments to which we have responded. Such inquiries did not lead
to any restrictions affecting our operations.

We attempt to manage our assets and liabilities so that income and
principal payments received from investments are adequate to meet the cash flow
requirements of our policyholder liabilities. The cash flows of our liabilities
are affected by actual maturities, surrender experience and credited interest
rates. We periodically perform cash flow studies under various interest rate
scenarios to evaluate the adequacy of expected cash flows from our assets to
meet the expected cash requirements of our liabilities. We utilize these
studies to determine if it is necessary to lengthen or shorten the average life
and duration of our investment portfolio. Because of the significant
uncertainties involved in the estimation of asset and liability cash flows,
there can be no assurance that we will be able to effectively manage the
relationship between our asset and liability cash flows.

The statutory filings of our insurance subsidiaries require
classifications of investments and the establishment of an asset valuation
reserve, designed to stabilize a companys statutory surplus against
fluctuations in the market value of stocks and bonds, according to regulations
prescribed by the NAIC. The asset valuation reserve consists of two main
components: a default component to provide for future credit-related losses
on fixed income investments and an equity component to provide for losses on
all types of equity investments, including real estate. The NAIC requires an
additional reserve, called the interest maintenance reserve, which consists of
the portion of realized capital gains and losses from the sale of fixed income
securities attributable to changes in interest rates. The interest maintenance
reserve is required to be amortized against earnings on a basis reflecting the
remaining period to maturity of the fixed income securities sold. These
regulations affect the ability of our insurance subsidiaries to reflect
investment gains and losses in current period statutory earnings and surplus.

13



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##### Table of Contents



The amounts related to Asset Valuation Reserve and Interest Maintenance
Reserve for the insurance subsidiaries at December 31, 2002 are summarized as
follows (in thousands):

|              |  |                   |     |                   |  |                     |        |  |  |   |       | 
|------------- |  | ----------------- | --- | ----------------- |  | ------------------- | ------ |  |  | - | ----- | 
|              |  |                   |     |                   |  | Maximum             |        |  |  |  
|              |  | Asset             |     | Asset             |  | Interest           
|              |  | Valuation Reserve |     | Valuation Reserve |  | Maintenance Reserve
|              |  |                   |     |                   |  |                    
|Standard Life |  | $                 | 401 |                   |  | $                   | 10,124 |  |  | $ | 1,326 | 
|Dixie Life    |  |                   |    |                   |  |                     | 402    |  |  |   | --    | 

The annual addition to the asset valuation reserve consists of a
factor-based basic contribution plus 20% of the difference between the reserve
objective and the accumulated balance. If the calculated reserve with current
year additions exceeds the maximum reserve amount, the reserve is reduced to
the maximum amount. For the year ended December 31, 2002, our U.S. subsidiaries
each made the required contribution to the asset valuation reserve.

Most jurisdictions require insurance companies to participate in guaranty
funds designed to cover claims against insolvent insurers. Insurers authorized
to transact business in these jurisdictions are generally subject to
assessments based on annual direct premiums written in that jurisdiction to pay
such claims, if any. These assessments may be deferred or forgiven under most
guaranty laws if they would threaten an insurers financial strength and, in
certain instances, may be offset against future state premium taxes. The
incurrence and amount of such assessments have increased in recent years and
may increase further in future years. The likelihood and amount of all future
assessments cannot be reasonably estimated and are beyond our control.

As part of their routine regulatory oversight process, approximately once
every three to five years, state insurance departments conduct periodic
detailed examinations of the books, records and accounts of insurance companies
domiciled in their states. Standard Life had an examination during 2001 for the
five-year period ended December 31, 2000 and Dixie Life had an examination
during 2001 for the three-year period ended December 31, 2000. These final
examination reports were issued in 2002 with no adjustments to the statutory
statements required.

The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation and federal taxation, do affect the insurance business. In
addition, legislation has been introduced from time to time in recent years,
which, if enacted, could result in the federal government assuming a more
direct role in the regulation of the insurance industry. The GLB Act has left
the currently existing regime of state insurance regulation largely intact;
however, more comprehensive federal legislation in this area is still being
actively considered by Congress.

In addition, the pharmaceutical industry has long been subject to
regulation by various federal, state and local agencies, primarily as to
product manufacture, safety, efficacy, advertising and labeling. In addition,
governmental bodies in the United States as well as other countries have
expressed concern about costs relating to health care, and in some cases, have
focused attention on the pricing of drugs and on appropriate drug utilization.
Government regulation may be expanded significantly in the United States in the
future. We are unable to predict the extent to which our business may be
affected by future regulatory developments.

Employees

As of January 31, 2003, we had 130 employees. We believe our future
success will depend, in part, on our ability to attract and retain
highly-skilled technical, marketing, support and management personnel. We
believe we have excellent relations with our employees.

Item 2. Properties

In December 2001, we signed a promissory note and mortgage due December
31, 2011, with a current outstanding principal amount of $6.8 million at
December 31, 2002, used to finance our home office building consisting of
58,000 square feet and located at 10689 North Pennsylvania Street,
Indianapolis, Indiana. Approximately 46,000 square feet of the building is
leased to Standard Life pursuant to a lease agreement entered into on January
1, 2002.

In June 2002, our warehouse lease was renegotiated from 16,000 to 10,000
square feet of space located at 2525 North Shadeland, Indianapolis, Indiana.
The lease expires on September 30, 2004.

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##### Table of Contents



Savers Marketing leases approximately 4,000 square feet in an office
building located at 8064 North Point Boulevard, Winston-Salem, North Carolina,
which was renegotiated in March 2002 and expires on March 31, 2005.

U.S. Health Services leases approximately 15,000 square feet in an office
building located at 6210 N. Technology Center Drive, Indianapolis, Indiana.
The lease expires April 16, 2007.

Item 3. Legal Proceedings

We are involved in various legal proceedings in the normal course of
business. In most cases, these proceedings involve claims under insurance
policies or other contracts. The outcome of these legal proceedings are not
expected to have a material adverse effect on the consolidated financial
position, liquidity, or future results of our operations based on our current
understanding of the relevant facts and law.

Item 4. Submission of Matters to a Vote of Securities Holders

At our Annual Meeting of Stockholders held on June 12, 2002, the following
individuals were elected to the Board of Directors:

|                  |  |            |           |                 |  |  |           | 
|----------------- |  | ---------- | --------- | --------------- |  |  | --------- | 
|                  |  | Shares For |           | Shares Withheld
|                  |  |            |           |                
|Robert A. Borns   |  |            | 4,971,054 |                 |  |  | 1,374,727 | 
|Raymond J. Ohlson |  |            | 4,571,637 |                 |  |  | 1,774,144 | 
|Robert J. Salyers |  |            | 4,971,172 |                 |  |  | 1,374,609 | 

A total of 6,345,781 shares were present in person or by proxy at the
Annual Meeting of Stockholders.

Our 2002 Stock Incentive Plan was adopted in all respects, with 2,090,660
shares voting for the plan, 2,057,754 shares voting against the plan and 13,732
shares abstained.

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##### Table of Contents






PART II

Item 5. Market for our Common Stock and Related Stockholder Matters

Our Common Stock trades on NASDAQ under the symbol SMAN. The following
table sets forth, for the periods indicated, the range of the high and low
sales prices of our Common Stock as reported by NASDAQ. We have never paid
cash dividends on our Common Stock. At the close of business on February 28,
2003 there were approximately 3,000 holders of record of the outstanding shares
of our Common Stock. Although our Common Stock is traded on NASDAQ, no
assurance can be given as to the future price of or the markets for the stock.

|     |                                  |  |              |       |     |  |   |       | 
|---- | -------------------------------- |  | ------------ | ----- | --- |  | - | ----- | 
|     |                                  |  | Common Stock
|     |                                  |  |             
|     |                                  |  | High         |       | Low
|     |                                  |  |              |       |    
|2002 |                                  |  |              |       |     |  |   |      
|     | Quarter ended March 31, 2002     |  | $            | 6.760 |     |  | $ | 4.200 | 
|     | Quarter ended June 30, 2002      |  |              | 9.000 |     |  |   | 4.820 | 
|     | Quarter ended September 30, 2002 |  |              | 7.700 |     |  |   | 4.370 | 
|     | Quarter ended December 31, 2002  |  |              | 4.950 |     |  |   | 2.710 | 
|2001 |                                  |  |              |       |     |  |   |      
|     | Quarter ended March 31, 2001     |  |              | 4.625 |     |  |   | 2.813 | 
|     | Quarter ended June 30, 2001      |  |              | 6.980 |     |  |   | 3.700 | 
|     | Quarter ended September 30, 2001 |  |              | 6.950 |     |  |   | 4.350 | 
|     | Quarter ended December 31, 2001  |  |              | 6.950 |     |  |   | 4.000 | 

16



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##### Table of Contents



Item 6. Selected Historical Financial Data

(Dollars in Thousands, Except Per Share Amounts and Shares Outstanding)

The following historical financial data was derived from our audited
Consolidated Financial Statements. This historical financial data should be
read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and our Consolidated Financial Statements
and related Notes.

|                                                                                                                                          |  |                                        |           |                        |         |      |           |      |         |      |           |         |        |   |           |  |        |   |           |     |        | 
|----------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | --------- | ---------------------- | ------- | ---- | --------- | ---- | ------- | ---- | --------- | ------- | ------ | - | --------- |  | ------ | - | --------- | --- | ------ | 
|                                                                                                                                          |  |                                        |           | Year Ended December 31
|                                                                                                                                          |  |                                        |           |                       
|                                                                                                                                          |  |                                        |           | 2002                   |         | 2001 |           | 2000 |         | 1999 |           | 1998(a)
|                                                                                                                                          |  |                                        |           |                        |         |      |           |      |         |      |           |        
|STATEMENT OF INCOME DATA:                                                                                                                 |  |                                        |           |                        |         |      |           |      |         |      |           |         |        |   |           |  |        |   |           |    
|Premium income                                                                                                                            |  | $                                      | 9,173     |                        |         | $    | 9,419     |      |         | $    | 9,433     |         |        | $ | 10,281    |  |        | $ | 14,384    | (c)
|Investment activity:                                                                                                                      |  |                                        |           |                        |         |      |           |      |         |      |           |         |        |   |           |  |        |   |           |    
|                                                                                                                                          |  | Net investment income                  |           |                        | 75,839  |      |           |      | 58,539  |      |           |         | 50,278 |   |           |  | 43,167 |   |           |     | 33,089 | 
|                                                                                                                                          |  | Call option gains (losses)             |           |                        | (10,089 | )    |           |      | (5,906  | )    |           |         | (7,603 | ) |           |  | 1,209  |   |           |     | 632    | 
|                                                                                                                                          |  | Net realized investment gains (losses) |           |                        | (19,841 | )    |           |      | (10,351 | )    |           |         | (4,492 | ) |           |  | 78     |   |           |     | 353    | 
|Total revenues                                                                                                                            |  |                                        | 66,431    |                        |         |      | 66,770    |      |         |      | 61,800    |         |        |   | 65,768    |  |        |   | 58,055    |    
|Interest expense and financing costs                                                                                                      |  |                                        | 4,351     |                        |         |      | 3,492     |      |         |      | 3,416     |         |        |   | 3,385     |  |        |   | 2,955     |    
|Total benefit and expenses                                                                                                                |  |                                        | 83,756    |                        |         |      | 66,361    |      |         |      | 58,524    |         |        |   | 59,636    |  |        |   | 54,002    |    
|Income (loss) before income taxes,
extraordinary loss, gain on sale of
discontinued operations and cumulative
effect of accounting change |  |                                        | (17,325   | )                      |         |      | 409       |      |         |      | 3,276     |         |        |   | 6,132     |  |        |   | 4,053     |    
|Gain on sale of discontinued operations                                                                                                   |  |                                        | 6,872     |                        |         |      |          |      |         |      |          |         |        |   |          |  |        |   |          |    
|Cumulative effect of accounting change for goodwill impairment                                                                            |  |                                        | (1,212    | )                      |         |      |          |      |         |      |          |         |        |   |          |  |        |   |          |    
|Net income (loss) from continuing
operations                                                                                              |  |                                        | (9,070    | )                      |         |      | 214       |      |         |      | 3,189     |         |        |   | 4,006     |  |        |   | 2,423     |    
|Net income (loss)                                                                                                                         |  |                                        | (1,130    | )                      |         |      | 1,780     |      |         |      | 5,267     |         |        |   | 5,272     |  |        |   | 4,681     |    
|PER SHARE DATA:                                                                                                                           |  |                                        |           |                        |         |      |           |      |         |      |           |         |        |   |           |  |        |   |           |    
|Net income (loss) from continuing
operations                                                                                              |  | $                                      | (1.19     | )                      |         | $    | .03       |      |         | $    | .41       |         |        | $ | .53       |  |        | $ | .35       |    
|Net income (loss) from continuing
operations, assuming dilution                                                                           |  |                                        | (1.14     | )                      |         |      | .03       |      |         |      | .41       |         |        |   | .51       |  |        |   | .33       |    
|Net income (loss), assuming dilution                                                                                                      |  |                                        | (.14      | )                      |         |      | .23       |      |         |      | .66       |         |        |   | .65       |  |        |   | .62       |    
|Book value per common share                                                                                                               |  |                                        | 11.17     |                        |         |      | 9.30      |      |         |      | 8.34      |         |        |   | 6.85      |  |        |   | 8.64      |    
|Weighted average common shares
outstanding, assuming dilution for
continuing operations                                                   |  |                                        | 7,938,554 |                        |         |      | 7,765,378 |      |         |      | 7,733,917 |         |        |   | 7,813,694 |  |        |   | 7,321,960 |    
|Weighted average common shares
outstanding, assuming dilution                                                                             |  |                                        | 7,938,554 |                        |         |      | 7,765,378 |      |         |      | 9,183,949 |         |        |   | 9,553,731 |  |        |   | 9,363,763 |    
|Common shares outstanding                                                                                                                 |  |                                        | 7,854,674 |                        |         |      | 7,546,493 |      |         |      | 7,545,156 |         |        |   | 7,785,156 |  |        |   | 7,641,454 |    
|BALANCE SHEET DATA (at year end)                                                                                                          |  |                                        |           |                        |         |      |           |      |         |      |           |         |        |   |           |  |        |   |           |    
|Invested assets                                                                                                                           |  | $                                      | 1,405,807 |                        |         | $    | 952,754   |      |         | $    | 742,463   |         |        | $ | 637,321   |  |        | $ | 581,119   |    
|Assets of Discontinued operations                                                                                                         |  |                                        |          |                        |         |      | 430,330   |      |         |      | 548,730   |         |        |   | 339,324   |  |        |   | 205,467   |    
|Total assets                                                                                                                              |  |                                        | 1,715,147 |                        |         |      | 1,613,653 |      |         |      | 1,470,457 |         |        |   | 1,150,977 |  |        |   | 956,150   |    
|Mortgage payable                                                                                                                          |  |                                        | 6,757     |                        |         |      | 6,900     |      |         |      |          |         |        |   |          |  |        |   |          |    
|Notes payable                                                                                                                             |  |                                        | 13,000    |                        |         |      | 19,100    |      |         |      | 31,500    |         |        |   | 34,500    |  |        |   | 35,000    |    
|Trust preferred securities                                                                                                                |  |                                        | 20,700    |                        |         |      | 20,700    |      |         |      |          |         |        |   |          |  |        |   |          |    
|Preferred stock                                                                                                                           |  |                                        |          |                        |         |      |          |      |         |      | 6,530     |         |        |   | 6,530     |  |        |   | 6,530     |    
|Shareholders equity                                                                                                                      |  |                                        | 87,734    |                        |         |      | 70,189    |      |         |      | 62,899    |         |        |   | 53,360    |  |        |   | 66,042    |    
|OTHER DATA:                                                                                                                               |  |                                        |           |                        |         |      |           |      |         |      |           |         |        |   |           |  |        |   |           |    
|Operating income (b)                                                                                                                      |  |                                        | 134       |                        |         |      | 7,329     |      |         |      | 7,333     |         |        |   | 5,221     |  |        |   | 4,448     |    
|Operating cash flows                                                                                                                      |  |                                        | 18,406    |                        |         |      | 7,990     |      |         |      | 935       |         |        |   | 2,853     |  |        |   | 207       |    

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##### Table of Contents



Notes to Selected Historical Financial Data
(Dollars in Thousands, Except Per Share Amounts)



|(a) |  | Comparison of consolidated financial information is significantly
affected by the acquisitions of Savers Life on March 12, 1998 and
Midwestern Life on October 30, 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Operating income is commonly used as a meaningful measure of reporting
results as a supplemental disclosure to net income. Operating income is
not a generally accepted accounting principle (GAAP) measure of
performance and may not be comparable to similarly titled measures used by
other companies. Operating income represents net income before 1)
extraordinary gains (losses), 2) net realized investment gains (losses)
(less related income taxes (benefits) and amortization), 3) gain on the
sale of discontinued operations and 4) cumulative effect of accounting
change for goodwill impairment. Operating income should be reviewed in
conjunction with net income and cash flow information included elsewhere
in this report.
|   
|(c) |  | Includes Medicare supplement premiums of $6.0 million related to the
Savers Life acquisition. This business was sold effective July 1, 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion highlights the principal factors affecting the
results of our operations and the significant changes in our balance sheet
items on a consolidated basis for the periods listed, as well as liquidity and
capital resources. This discussion should be read in conjunction with the
accompanying Consolidated Financial Statements, related Notes and Selected
Historical Financial Data.

Forward-looking Statements

All statements, trend analyses, and other information contained in this
Annual Report on Form 10-K or any document incorporated by reference herein
relative to markets for our products and trends in our operations or financial
results, as well as other statements including words such as anticipate,
believe, plan, estimate, expect, intend and other similar
expressions, constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
known and unknown risks, uncertainties and other factors, which may cause
actual results to be materially different from those contemplated by the
forward-looking statements. Such factors include, but are not limited to:



| |  |  | General economic conditions and other factors, including prevailing
interest rate levels, and stock market performance, which may affect our
ability to sell products, the market value of our investments and the
lapse rate and profitability of our policies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our ability to achieve anticipated levels of operational efficiencies
at recently acquired companies, as well as through other cost-saving
initiatives.                                                                                                         
|
| |  |  | Customer response to new products, distribution channels and marketing initiatives.                                                                                                                                                                             
|
| |  |  | Mortality, morbidity and other factors which may affect the profitability of our insurance products.                                                                                                                                                            
|
| |  |  | Changes in the federal income tax laws and regulation which may
affect the relative tax advantages of some of our products.                                                                                                                                     
|
| |  |  | Increasing competition in the sale of our products.                                                                                                                                                                                                             
|
| |  |  | Regulatory changes or actions, including those relating to regulation
of financial services affecting bank sales and underwriting of insurance
products, regulation of the sale, underwriting and pricing of insurance
products.                                
|
| |  |  | The availability and terms of future acquisitions.                                                                                                                                                                                                              
|
| |  |  | The risk factors or uncertainties listed from time to time in any document incorporated by reference herein.                                                                                                                                                    

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##### Table of Contents



Product Profitability

The long-term profitability of life insurance and annuity products depends
on the accuracy of the actuarial assumptions that underlie the pricing of such
products. Actuarial calculations for such insurance products, and the ultimate
profitability of such products, are based on four major factors: 1)
persistency, 2) mortality, 3) return on cash invested by the insurer during the
life of the policy and 4) expenses of acquiring and administering the policies.

Interest spreads represent a major profit source on interest sensitive
life and annuity products, so margins on these products are sensitive to
interest rate fluctuations. In general, we are able to maintain spreads by
adjusting credited interest rates for changes in our earned rates, subject to
competitive and timing constraints. However, there are corollary effects of
interest rate changes.

Rising interest rates result in a decline in the market value of assets,
and also tend to result in increased policyholder surrenders as other
investment options become relatively more attractive. The effect of increased
surrenders is to reduce earnings over the long term. Current period earnings
effect may vary depending on the level of surrender charges and deferred policy
acquisition costs (DAC) and present value of future profits (PVFP) assets.
In addition, increasing interest rates give rise to disintermediation risk, the
risk that assets must be sold at depressed values in order to fund increased
surrender payments. This risk is mitigated by properly matching assets and
liabilities.

We seek to closely match the estimated duration of our invested assets to
the expected duration of our liabilities. When the estimated durations of
assets and liabilities are similar, exposure to interest rate risk is minimized
because a change in the value of assets should be largely offset by a change in
the value of liabilities. A significant mismatch of the durations of invested
assets and liabilities could have an impact on our future financial results.

Declining interest rates generally have little immediate effect on our
investment earnings rates. Over time, as we invest positive cash flows at lower
rates, our earned rates decline. In such an environment, we attempt to adjust
credited interest rates accordingly, subject to competitive pressures. In most
situations, this action allows us to maintain our margins. However, the
sustained period of low interest rates may impact future interest spreads,
results of operations and financial condition.

The average expected remaining life of Standard Lifes traditional life
and annuity business in force at December 31, 2002 was 7.5 years. This
calculation was determined based upon our actuarial models and assumptions as
to expected persistency and mortality. Persistency is the extent to which
insurance policies sold are maintained by the insured. The persistency of life
insurance and annuity products is a critical element of their profitability.
However, a surrender charge often applies in the early contract years and
declines to zero over time.

Life insurance policyholders sometimes do not pay premiums, thus causing
their policies to lapse. For the years 2002, 2001 and 2000 Standard Life
experienced total policy lapses, excluding surrenders, of 3.4%, 3.7% and 5.7%
of total policies in force at December 31 of each year, respectively. Ongoing
premiums are not required for annuity policies, so annuities do not experience
policy lapses.

Variances Between Actual and Expected Profits.Actual experience on
purchased and produced insurance may vary from projections due to differences
in renewal premiums collected, investment spreads, mortality costs,
persistency, administrative costs and other factors. Variances from original
projections, whether positive or negative, are included in net income as they
occur. To the extent that these variances indicate that future experience will
differ from the estimated profits reflected in the capitalization and
amortization of the PVFP and DAC assets, current and future amortization rates
may be adjusted.

Product Accounting

Present Value of Future Profits.In accordance with industry practice,
when we purchase a block of existing insurance business, we assign a portion of
the purchase price, PVFP, as the pre-tax value of the business acquired. The
asset is the discounted value of future cash flows arising from the existing
block of business. The discount rate used is based upon many elements, such as
yields generated on similar business, our cost of capital and the interest rate
environment as of the purchase date. Discount rates used in determining our
PVFP assets range from 8% to 18%.

After purchase, amortization of the asset occurs in proportion to profits
emerging from the purchased policies. The asset is amortized over the expected
life of the block of business. The percentages of expected net amortization of
the beginning balance of the total PVFP asset as of December 31, 2002 are
expected to be between 10% and 15% in each of the years 2003 through 2007.

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##### Table of Contents



Deferred Policy Acquisition Costs.Insurance policies issued after the
purchase date of a company will generate significant costs that vary directly
with and relate to the acquisition of the new business. Under GAAP accounting
rules, these acquisition costs on new policies are to be capitalized and
recorded as DAC. For universal and interest sensitive life and annuity
products, the DAC asset is amortized in proportion to estimated gross profits
over the life of the contract. For immediate annuities, DAC is amortized so as
to produce a constant yield on the net policyholder liability. Virtually all
of our DAC is a result of writing annuity products.

Amortization of DAC related to operations was $19.0 million, $10.7
million and $8.7 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The increase in current year amortization expense resulted
primarily from the emergence of gross profits from business sold in recent
years and the acceleration of DAC amortization due to DAC unlocking. Future
expected amortization of DAC, assuming no new business after December 31, 2002
and current assumptions, is as follows (in thousands):

|                      |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|--------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                      |  | 2003 |        | 2004 |  | 2005 |        | 2006 |  | 2007
|                      |  |      |        |      |  |      |        |      |  |     
|Gross amortization    |  | $    | 26,258 |      |  | $    | 24,879 |      |  | $    | 21,793 |  |  | $ | 18,584 |  |  | $ | 15,428 | 
|Interest accumulation |  |      | 4,980  |      |  |      | 4,036  |      |  |      | 3,276  |  |  |   | 2,683  |  |  |   | 2,178  | 
|                      |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Net amortization      |  | $    | 21,278 |      |  | $    | 20,843 |      |  | $    | 18,517 |  |  | $ | 15,901 |  |  | $ | 13,250 | 
|                      |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 

Accounting for Deferred Annuities and Universal and Interest-Sensitive
Life Products.We primarily account for our annuity, universal and
interest-sensitive life policy deposits in accordance with Statement of
Financial Accounting Standards No. 97 (SFAS No. 97), Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses on the Sale of Investments. Under SFAS No. 97, a
benefit reserve is established at the time of policy issuance in an amount
equal to the deposits received. Thereafter, the benefit reserve is adjusted for
any additional deposits, interest credited and partial or complete withdrawals.
Revenues for annuities and universal and interest-sensitive life policies,
other than certain non-interest sensitive annuities, consist of policy charges
for surrenders and partial withdrawals, mortality and administration, and
investment income earned. These revenues do not include the annuity, universal
and interest-sensitive life policy deposits. Expenses related to these products
include interest credited to policyowner account balances, operating costs for
policy administration, amortization of DAC and mortality costs in excess of
account balances.

Costs relating to the acquisition of new business, primarily commissions
paid to agents, which vary with and are directly related to the production of
new business, are deferred to the extent that such costs are recoverable from
future profit margins. At the time of issuance, the acquisition expenses,
approximately 12% of our initial annuity premium deposits are capitalized as
DAC. In accordance with SFAS No. 97, DAC with interest is amortized over the
lives of the policies in a constant relationship to the present value of
estimated future gross profits.

Accounting for Equity Indexed Annuities. Revenues and expenses for
equity-indexed annuities are recognized in accordance with the SFAS No. 97
model, described above. Policy liabilities for equity-indexed annuities are
computed in accordance with SFAS No. 133 which requires that an equity-indexed
annuity liability be bifurcated into a host contract and a derivative
contract. The host contract liability is a book value liability providing for
the equity-indexed annuity policys guaranteed benefits. The derivative
contract liability is a market value liability providing for the equity-linked
benefits available in the policy. The derivative liability includes a liability
for equity-linked benefits accruing during the current contract year, as well
as liability amounts for future equity benefits which have not yet been
granted.

Accounting for Traditional Life Products. Traditional life insurance
products are accounted as long-duration insurance contracts in accordance with
Statement of Financial Accounting Standards No. 60 (SFAS No. 60), Accounting
and Reporting by Insurance Enterprises. Under SFAS No. 60, benefit reserves
are actuarially calculated using the net level reserve method. Revenues
consist of policy premiums and investment income on assets supporting policy
liabilities. Expenses consist of policy benefits incurred, increases in policy
liabilities, and operating costs for policy administration, and amortization of
DAC.

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Costs related to the acquisition of new business, primarily commissions
paid to agents, which vary with and are directly related to the production of
new business, are deferred to the extent that such costs are recoverable from
future profit margins. At the time of issuance, the acquisition expenses are
capitalized as DAC. In accordance with SFAS No. 60, DAC with interest is
amortized over the lives of the policies in a constant relationship to policy
premiums.

Accounting for Immediate Annuities. Immediate annuities with no life
contingent payments, which comprise the majority of our immediate annuities in
force and the majority of new immediate annuity sales, are accounted as
investment contracts in accordance with FAS No. 97. Revenues consist of
investment income, and expenses consist of the imputed interest credits to
policies as well as operating costs for policy administration. An initial net
premium policy liability is established as initial premium less acquisition
costs. The imputed credited rate is the rate, which equates this net premium to
the guaranteed payments. After issue, the liability changes by the amount of
imputed interest credits and benefit payments. For balance sheet purposes, this
net premium liability is presented as a gross premium liability offset by a DAC
asset.

Immediate annuities with payments contingent on the survival of the
annuitant are accounted as limited-payment contracts in accordance with FAS No.
60, with revenue recognition, expense recognition, and liabilities computed as
described above for traditional life products.

CRITICAL ACCOUNTING POLICIES

The accounting polices described below require management to make
significant estimates and assumptions using information available at the time
the estimates are made. Such estimates and assumptions significantly affect
various reported amounts of assets and liabilities. Management has made
estimates in the past that we believed to be appropriate but were subsequently
revised to reflect actual experience. If our future experience differs
materially from these estimates and assumptions, our results of operations and
financial condition could be affected. Accordingly, we consider them to be
critical in preparing our consolidated financial statements. A more detailed
description of our accounting policies is included in the Notes to our
Consolidated Financial Statements.

Investments

The carrying value of our investment portfolio was $1.4 billion at
December 31, 2002. The accounting risks associated with these assets relate to
the recognition of income, our determination of other-than-temporary
impairments and our estimation of fair values.

We amortize premiums and discounts as yield adjustments over the
contractual lives of fixed maturity securities. We consider anticipated
prepayments on mortgage-backed securities in determining estimated future
yields on such securities.

When we sell a security, we report the difference between the sales
proceeds and amortized cost (determined based on specific identification) as an
investment gain or loss.

We periodically evaluate whether the declines in fair value of our
investments are other-than-temporary. Our evaluation consists of a review of
qualitative and quantitative factors. For investments with publicly quoted
market prices, we generally consider a decline to be an other-than-temporary
impairment if the quoted market price is less than its accounting basis for
three quarters, absent evidence to the contrary. We also consider additional
factors to determine whether the declines in fair value are
other-than-temporary, such as downgrades of the security by a rating agency,
deterioration in the financial condition of the issuer, and other publicly
available issuer-specific news or general market conditions. For investments
in companies with no quoted market price, we consider similar qualitative and
quantitative factors and also take into account the cost of the investment, the
type of investment, subsequent purchases of the same or similar investments,
the current financial position and operating results of the company invested
in, and such other factors as may be relevant. Declines in fair values of
securities deemed to be other-than-temporary are recognized as a reduction of
net income.

Determining what constitutes an other-than-temporary decline involves
significant judgment. Declines in fair value below cost not considered
other-than-temporary in the current period could be considered
other-than-temporary in a future period and reduce earnings to the extent of
the write-down.

Estimated fair values for our investments are determined based on
estimates from nationally recognized pricing services, broker-dealer market
makers, and internally developed methods. Our internally developed methods
require us to make judgments about the securitys credit quality, liquidity and
market spread.

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Equity indexed call options are derivative instruments linked to the major
stock indices (S&P 500 Index and DJIA) which are used to hedge the equity
benefits of our equity indexed annuity products. We purchase call options whose
payoff characteristics mirror the equity benefits of our products. These
securities are carried at fair value and the change in fair value is included
in net investment income.

DAC and PVFP

The combined balance of our DAC and PVFP was $168.9 million. The recovery
of these costs is dependent on the future profitability of the related business
at December 31, 2002.

Each year, we evaluate the recoverability of the unamortized balance of
the DAC and PVFP. We consider estimated future gross profits or future
premiums, expected mortality or morbidity, interest earned and credited rates,
persistency and expenses in determining whether the balance is recoverable. If
we determine a portion of the unamortized balance is not recoverable, it is
charged to amortization expense.

The assumptions we use to amortize and evaluate the recoverability of the
DAC and PVFP involve significant judgment. A significant revision to these
assumptions will impact future financial results.

Goodwill

The balance of our goodwill was $6.4 million at December 31, 2002. The
recovery of this asset is dependent on the fair value of the business to which
it relates. Prior to January 1, 2002, these assets were generally amortized
over a 20-40 year period. Effective in 2002, pursuant to SFAS No. 142,
Goodwill and Other Intangible Assets, (SFAS No. 142), goodwill is no longer
amortized but is subject to annual impairment tests based on the estimated fair
value of the business units that comprise our domestic segment. There are
numerous assumptions and estimates underlying the determination of the
estimated fair value of these businesses. Different valuation methods and
assumptions can produce significantly different results that could affect the
amount of any potential impairment charge that might be required to be
recognized. A charge of $1.2 million resulting from the impairment of goodwill
from the adoption of SFAS No. 142 was recorded in 2002.

Income Taxes

Our income tax expense includes deferred income taxes arising from
temporary differences between the financial reporting and tax basis of assets
and liabilities and capital loss carryforwards. We have gross deferred income
tax assets of $48.4 million at December 31, 2002. In assessing the
realization of our deferred income tax assets, we consider whether it is more
likely than not that the deferred income tax assets will be realized. The
ultimate realization of our deferred income tax assets depends upon generating
future taxable income during the periods in which our temporary differences
become deductible and capital gains before our capital loss carryforwards
expire. We evaluate the recoverability of our deferred income tax assets by
assessing the need for a valuation allowance on a quarterly basis. If we
determine that it is more likely than not that our deferred income tax assets
will not be recovered, a valuation allowance will be established against some
or all of our deferred income tax assets. This could have a significant effect
on our future results of operations and financial position.

No valuation allowance has been provided on our deferred income tax assets
at December 31, 2002, as we believe it is more likely than not that all such
assets will be realized. We reached this conclusion after considering the
availability of taxable income in prior carryback years, tax planning
strategies, and the likelihood of future taxable income exclusive of reversing
temporary differences and carryforwards. Differences between forecasted and
actual future operating results could adversely impact our ability to realize
our deferred income tax assets.

Liabilities for Insurance Products

The total balance of our liabilities for insurance products was $1.57
billion at December 31, 2002. These liabilities are often payable over an
extended period of time and the profitability of the related products is
dependent on the pricing of the products and other factors. Differences
between pricing assumptions and actual experience will impact future financial
results.

We calculate and maintain reserves for the estimated future payment of
claims to our policyholders based on actuarial assumptions. These assumptions
are generally best estimates, with moderate provision for adverse deviation.
Many factors can affect the adequacy of these reserves and liabilities, such as
economic and social conditions, inflation, changes in doctrines of legal
liability and extra contractual damage awards. Therefore, the reserves and
liabilities we establish are necessarily based on extensive estimates,
assumptions and historical experience. Establishing reserves is an uncertain

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process, and it is possible that actual claims will materially exceed our
reserves and have a material adverse effect on our results of operations and
financial condition. Our financial results depend significantly upon the
extent to which our actual claims experience is consistent with the assumptions
we used in determining our reserves and pricing our products. If our
assumptions with respect to future claims are incorrect, and our reserves are
insufficient to cover our actual losses and expenses, we would be required to
increase our liabilities, negatively affecting our operating results.

Liabilities for Loss Contingencies Related to Legal Proceedings

We are involved in various legal proceedings in the normal course of
business. The ultimate outcome of these legal proceedings cannot be predicted
with certainty. We recognize an estimated loss from these loss contingencies
when we believe it is probable that a loss has been incurred and the amount of
the loss can be reasonably estimated. However, it is difficult to measure the
actual loss that might be incurred related to legal proceedings. The ultimate
outcome of these lawsuits are not expected to have a material adverse effect on
our consolidated results of operations and financial position based on our
current understanding of the relevant facts and laws.

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Results of operations by segment for the three years ended December 31, 2002:

The following tables and narratives summarize the results of our operations by
business segment:

|                                                                                                                            |                                           |   |                        |     |      |   |        |       |  |   |        |       | 
|--------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | - | ---------------------- | --- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                                                                            |                                           |   | 2002                   |     | 2001 |   | 2000  
|                                                                                                                            |                                           |   |                        |     |      |   |       
|                                                                                                                            |                                           |   | (Dollars in thousands)
|Operating income (loss) before income taxes (Continuing
operations)                                                         |                                           | $ | (7,351                 | )   |      | $ | 6,955  |       |  | $ | 5,440  |      
|                                                                                                                            |                                           |   |                        |     |      |   |        |       |  |   |        |      
|Operating income before income taxes (Discontinued operations)                                                              |                                           |   | 1,618                  |     |      |   | 2,164  |       |  |   | 3,128  |      
|                                                                                                                            |                                           |   |                        |     |      |   |        |       |  |   |        |      
|Consolidated operating income (loss) before income taxes                                                                    |                                           |   | (5,733                 | )   |      |   | 9,119  |       |  |   | 8,568  |      
|Income taxes (benefits) related to operating income (loss)                                                                  |                                           |   | (5,867                 | )   |      |   | 1,790  |       |  |   | 1,235  |      
|                                                                                                                            |                                           |   |                        |     |      |   |        |       |  |   |        |      
|                                                                                                                            | Consolidated operating income after taxes |   |                        | 134 |      |   |        | 7,329 |  |   |        | 7,333 | 
|                                                                                                                            |                                           |   |                        |     |      |   |        |       |  |   |        |      
|Consolidated realized investment losses before
income tax benefits                                                          |                                           |   | (9,974                 | )   |      |   | (7,329 | )     |  |   | (2,164 | )    
|                                                                                                                            |                                           |   |                        |     |      |   |        |       |  |   |        |      
|Income tax benefits related to realized
investment losses                                                                   |                                           |   | (3,050                 | )   |      |   | (1,780 | )     |  |   | (457   | )    
|                                                                                                                            |                                           |   |                        |     |      |   |        |       |  |   |        |      
|Consolidated realized investment losses
after tax benefits                                                                  |                                           |   | (6,924                 | )   |      |   | (5,549 | )     |  |   | (1,707 | )    
|Income (loss) before extraordinary loss, gain on sale of
discontinued operations and cumulative effect of accounting
change |                                           |   | (6,790                 | )   |      |   | 1,780  |       |  |   | 5,626  |      
|                                                                                                                            |                                           |   |                        |     |      |   |        |       |  |   |        |      
|Extraordinary loss, net of $185 tax benefit                                                                                 |                                           |   |                       |     |      |   |       |       |  |   | (359   | )    
|Gain on sale of discontinued operations                                                                                     |                                           |   | 6,872                  |     |      |   |       |       |  |   |        |      
|Cumulative effect of accounting change for goodwill impairment                                                              |                                           |   | (1,212                 | )   |      |   |       |       |  |   |       |      
|                                                                                                                            |                                           |   |                        |     |      |   |        |       |  |   |        |      
|Net income (loss)                                                                                                           |                                           | $ | (1,130                 | )   |      | $ | 1,780  |       |  | $ | 5,267  |      
|                                                                                                                            |                                           |   |                        |     |      |   |        |       |  |   |        |      

Consolidated Results and Analysis

Our 2002 net loss was $1.1 million, or $.14 per diluted share. The
results for 2002 were impacted by 1) accelerated amortization of deferred
acquisition costs on fixed annuity products of $5.1 million, 2) a reserve
strengthening adjustment of $1.5 million, 3) write-off and legal costs related
to the recovery of agency receivable balances of $.9 million, 4) operating
expenses related to the development of our new U.S. Health Services Corporation
subsidiary of $1.1 million, and 5) an increase in net realized investment
losses, less related amortization and taxes, attributable to write-downs on the
value of collateralized debt obligations due to increased default rates and
weaknesses in the energy and telecommunications sectors of $6.9 million. The
above decreases in net income were partially offset by a $2.6 million tax
benefit over the prior year.

Also occurring in 2002, a gain on discontinued operations of $6.9 million
related to the sale of our International Operations was recorded. In addition,
a charge of $1.2 million resulting from the impairment of goodwill from the
adoption of SFAS No. 142 was recorded. No extraordinary losses occurred in
2002.

Our 2001 net income was $1.8 million, or $.23 per diluted share, down 65%
per share over the comparable 2000 period. The results for 2001 were impacted
by 1) an increase in the Companys effective tax rate resulting in $.6 million;
2) an increase in net realized investment losses, less related amortization and
taxes, attributable to the sale of Enron bonds and write-downs on the value of
collateralized debt obligations due to increased default rates from the
economic slow down of $3.8 million; 3) litigation settlement costs of $.3
million, and 4) reduced spread on interest sensitive products of $.4 million.
These above decreases in net income were somewhat offset by paid life insurance
claims, less related reserves, of $.9 million. No extraordinary losses
occurred in 2001.

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Domestic operations (Continuing operations):

|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |         |         |        | 
|------------------------------------------------------------------------------------------ | ---------------------------------------------------------- | ------------------------------------- | ------------------------------------------- | ------- | ---------------------- | ------- | ------- | ------- | ------- | ------ | --------- | ------- | ------- | ------ | 
|                                                                                           |                                                            |                                       |                                             |         | 2002                   |         | 2001    |         | 2000   
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |        
|                                                                                           |                                                            |                                       |                                             |         | (Dollars in thousands)
|Premiums and deposits collected:                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|                                                                                           | Traditional life                                           |                                       | $                                           | 9,173   |                        |         | $       | 9,419   |         |        | $         | 9,433   |        
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|                                                                                           | Deferred annuities                                         |                                       |                                             | 320,659 |                        |         |         | 178,238 |         |        |           | 94,699  |        
|                                                                                           | Equity-indexed annuities                                   |                                       |                                             | 126,009 |                        |         |         | 67,159  |         |        |           | 73,122  |        
|                                                                                           | Single premium immediate annuities and other deposits      |                                       |                                             | 151,513 |                        |         |         | 76,435  |         |        |           | 27,802  |        
|                                                                                           | Universal and interest-sensitive life                      |                                       |                                             | 601     |                        |         |         | 641     |         |        |           | 866     |        
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|                                                                                           | Subtotal  interest-sensitive and other financial products |                                       |                                             | 598,782 |                        |         |         | 322,473 |         |        |           | 196,489 |        
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|                                                                                           |                                                            | Total premiums and deposits collected |                                             | $       | 607,955                |         |         | $       | 331,892 |        |           | $       | 205,922 |       
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|                                                                                          
|Statement of Operations:                                                                   |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|Premium income                                                                             |                                                            | $                                     | 9,173                                       |         |                        | $       | 9,419   |         |         | $      | 9,433     |        
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|Policy income                                                                              |                                                            |                                       | 8,084                                       |         |                        |         | 7,721   |         |         |        | 8,204     |        
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|                                                                                           |                                                            |                                       | Total policy related income                 |         |                        | 17,257  |         |         |         | 17,140 |           |         |         | 17,637 | 
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|Net investment income                                                                      |                                                            |                                       | 75,839                                      |         |                        |         | 58,539  |         |         |        | 50,278    |        
|Call option losses                                                                         |                                                            |                                       | (10,089                                     | )       |                        |         | (5,906  | )       |         |        | (7,603    | )      
|Fee and other income                                                                       |                                                            |                                       | 3,265                                       |         |                        |         | 7,348   |         |         |        | 5,980     |        
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|                                                                                           |                                                            |                                       | Total revenues                              |         |                        | 86,272  |         |         |         | 77,121 |           |         |         | 66,292 | 
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|Benefits and claims                                                                        |                                                            |                                       | 9,938                                       |         |                        |         | 12,975  |         |         |        | 13,795    |        
|Interest credited to interest sensitive annuities and other financial
products             |                                                            |                                       | 42,650                                      |         |                        |         | 30,227  |         |         |        | 21,335    |        
|Amortization                                                                               |                                                            |                                       | 20,489                                      |         |                        |         | 8,932   |         |         |        | 9,703     |        
|Commission expenses                                                                        |                                                            |                                       | 1,206                                       |         |                        |         | 3,871   |         |         |        | 1,918     |        
|Operating expenses                                                                         |                                                            |                                       | 14,989                                      |         |                        |         | 10,669  |         |         |        | 10,685    |        
|Interest expense and financing costs                                                       |                                                            |                                       | 4,351                                       |         |                        |         | 3,492   |         |         |        | 3,416     |        
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|                                                                                           |                                                            |                                       | Total benefits and expenses                 |         |                        | 93,623  |         |         |         | 70,166 |           |         |         | 60,852 | 
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|                                                                                           |                                                            |                                       | Operating income (loss) before income taxes |         |                        | (7,351  | )       |         |         | 6,955  |           |         |         | 5,440  | 
|Net realized investment losses, net of related amortization                                |                                                            |                                       | (9,974                                      | )       |                        |         | (6,546  | )       |         |        | (2,164    | )      
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|                                                                                           |                                                            |                                       | Income (loss) before income taxes           |         | $                      | (17,325 | )       |         | $       | 409    |           |         | $       | 3,276  | 
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|                                                                                          
|Supplemental Information:                                                                  |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|Number of annuity contracts in force                                                       |                                                            |                                       | 38,194                                      |         |                        |         | 28,482  |         |         |        | 24,216    |        
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|Interest-sensitive annuity and other financial
products reserves, net of reinsurance ceded |                                                            | $                                     | 1,422,628                                   |         |                        | $       | 926,539 |         |         | $      | 695,475   |        
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|Number of life policies in force                                                           |                                                            |                                       | 50,791                                      |         |                        |         | 53,005  |         |         |        | 55,533    |        
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        
|Life insurance in force, net of reinsurance ceded                                          |                                                            | $                                     | 618,430                                     |         |                        | $       | 744,569 |         |         | $      | 1,042,566 |        
|                                                                                           |                                                            |                                       |                                             |         |                        |         |         |         |         |        |           |        

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General:Our Domestic operations (Continuing operations) segment consists of
revenues earned and expenses incurred from our United States operations. Our
primary products include deferred annuities, equity-indexed annuities and
single premium immediate annuities. The profitability of this segment is
primarily a function of net investment spread (the difference between the
investment income earned on our investments less the interest we credit to our
policyholders), persistency of the in force business, mortality experience and
management of our operating expenses.

Premium depositsconsist of deposits from our flexible premium deferred
annuities, equity-indexed annuities, single premium immediate annuities and
other financial products that do not incorporate significant mortality
features. For GAAP, these premium deposits are not shown as premium income in
the income statement. A change in premium deposits in a single period does not
directly cause our operating income to change, although continued increases or
decreases in premiums may affect the growth rate of assets on which investment
spreads are earned.



| |  |  | Premium deposits for 2002 increased $276.3 million or 86%, to $598.8
million. Deferred annuities increased $142.4 million or 80%, to $320.6
million. Equity indexed annuities increased $58.8 million or 88%, to
$126.0 million. Single premium immediate annuities and other deposits
increased $75.1 million or 98%, to $151.5 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Premium deposits for 2001 increased $126.0 million or 64%, to $322.5
million. Deferred annuities increased $83.5 million or 88%, to $178.2
million. Equity indexed annuities decreased $6.0 million or 8%, to $67.2
million. Single premium immediate annuities and other deposits increased
$48.6 million or 175%, to $76.4 million.    

The increase for 2002 relates to 1) an expanded geographical presence, 2)
favorable agent retention, 3) enhanced presence in the single premium immediate
annuity market, and 4) the development of an interactive agent website.

Premium incomeconsists of premiums earned from 1) traditional life products
and 2) annuity products that incorporate significant mortality features.



| |  |  | Premium income for 2002 decreased $.2 million or 3%, to $9.2 million.                                                                                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Premium income for 2001 remained constant at $9.4 million. Effective
August 2001, we suspended the active marketing of life products
indefinitely, however we continue to manage our in force life business.

Policy incomerepresents 1) mortality income and administrative fees earned on
universal life products, and 2) surrender income earned as a result of
terminated universal life and annuity policies.



| |  |  | During 2002, policy income increased $.4 million or 5%, to $8.1
million.                                                                                                                                                                                                                                        
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During 2001, policy income decreased $.5 million or 6%, to $7.7
million, which includes a $.3 million decline in surrender income.
Generally, during a declining interest rate environment, policyholders
are less likely to terminate existing annuity policies, therefore,
resulting in less surrender income.

Net investment incomeincludes interest earned on invested assets and
fluctuates with changes in 1) the amount of average invested assets supporting
insurance liabilities and 2) the average yield earned on those invested assets.



| |  |  | During 2002, net investment income increased $17.3 million or 30% to
$75.9 million. Average cash and invested assets, at book value,
increased by $347.2 million or 39% due to the growth in insurance
liabilities from annuity sales in recent periods.        
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During 2001, net investment income increased $8.3 million or 16% to
$58.5 million. Average cash and invested assets, at book value,
increased by $145.0 million or 20% due to the growth in insurance
liabilities from annuity sales in recent periods.         
|
| |  |  | The net investment yield earned on our average invested assets was
6.53%, 7.14% and 7.26% for the years ended 2002, 2001 and 2000,
respectively. Investment yields fluctuate from period to period and
include changes in the general interest rate environment.
|
| |   |  | Net investment income for 2002 was unfavorably impacted by defaulted bonds
and lower earned rates on current year investment purchases.                                                                                                                         

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Call option lossesrelate to equity-indexed products that are hedged with call
options to limit risk against unusually high crediting rates from favorable
returns in the equity market. The market value of these options fluctuate from
period to period and are substantially offset by amounts credited to
policyholder account balances.



| |  |  | During 2002, call option losses increased by $4.2 million or 71%, to $10.1 million.
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | During 2001, call option losses decreased by $1.7 million or 22%, to $5.9 million. 

Call option losses for the 2002 and 2001 periods were due to the impact from
changes in the market value of our call options as a result of changes in the
S&P 500 Index and the purchase of additional options to support increased
equity-indexed liabilities.

See also Interest credited to interest sensitive annuities and other financial
products for information regarding the impact of our equity-indexed products.

Fee and other incomeconsist of fee income related to servicing unaffiliated
blocks of business and commission income.



| |  |  | During 2002, fee and other income decreased by $4.1 million or 56% to
$3.3 million. This decrease results from the termination of a marketing
and administration contract in 2002.                                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During 2001, fee and other income increased by $1.4 million or 23% to
$7.3 million. This increase includes commission income from Savers
Marketing of $6.2 million, an increase of $1.5 million compared to the
2000 period.

Benefits and claimsinclude 1) mortality experience, 2) benefits from other
policies that incorporate significant mortality features and 3) changes in
future policy reserves. Throughout our history, we have experienced periods of
higher and lower benefit claims. Such volatility is not uncommon in the life
insurance industry and, over extended periods of time, periods of higher claim
experience tend to offset periods of lower claim experience.



| |  |  | Benefits and claims in 2002 decreased by $3.1 million or 24%, to $9.9
million. This decrease includes the impact from single premium
immediate annuity reserves of approximately $1.7 million, which is
offset by a comparable increase in interest credited. In addition, we
experienced favorable mortality of $.5 million compared to the 2001
period.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Benefits and claims in 2001 decreased by $.8 million or 6%, to $13.0
million, as a result of favorable mortality of $.9 million compared to
the 2000 period.                                                                                                                                                                                             

Interest credited to interest sensitive annuities and other financial products
represents interest credited to insurance liabilities of deferred annuities,
equity-indexed annuities, single premium immediate annuities and other
financial products. This expense fluctuates with changes in 1) the average
interest-sensitive insurance liabilities, 2) the average credited rate on those
liabilities, and 3) the market value fluctuations of call options.



| |  |  | In 2002, interest credited increased $12.4 million or 41%, to $42.6
million due to increased average interest sensitive liabilities of
$384.0 million or 48% compared to the 2001 period, partially offset by a
reduction in credited rates. In addition, interest credited decreased
$1.8 million as a result of market value changes of call options
supporting our equity-indexed products. Reserve strengthening actions
increased credited interest by $2.4 million. Also included is an
increase of $1.7 million from single premium immediate annuities offset
by a comparable decrease in benefit and claims.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In 2001, interest credited increased $8.9 million or 42%, to $30.2
million due to increased average interest sensitive liabilities of
$159.2 million or 25% compared to the 2000 period. In addition,
interest credited increased $3.7 million as a result of market value
changes of call options supporting our equity-indexed products.                                                                                                                                                                                                                                                                           
|
| |  |  | Our weighted average credited rate was 4.23%, 4.30% and 4.90% for the
years ended 2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

27



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The decrease in our weighted average crediting rate for 2002 is primarily
due to credited rate reductions on in force business as well as lower credited
rates on new sales in the current environment.

Amortizationincludes 1) amortization related to the present value of polices
purchased from acquired insurance business, 2) amortization of deferred policy
acquisition costs related to capitalized costs of insurance business sold, and
3) amortization of goodwill for the 2001 period.



| |  |  | Amortization in 2002 increased by $11.6 million or 129%, to $20.5
million. This increase relates primarily to a $7.8 million acceleration
of DAC amortization due to DAC unlocking and the emergence of gross
profits from business sold in recent years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   |  | Acquisition costs for deferred annuity contracts and equity indexed
annuity contracts are required to be amortized over the lives of the
contracts in relation to the incidence of estimated gross profits.
Estimated gross profits on fixed and equity indexed annuity contracts
include investment spread, surrender income, expense margins, and realized
investment gains and losses. Gross profit estimates are evaluated
regularly, with historical gross profit estimates adjusted to actual
results and projected gross profit estimates updated to reflect current
expectations. DAC amortization is adjusted both retrospectively and
prospectively (unlocked) in accordance with the revised profit stream, and
retrospective adjustments are reported in the current reporting period.
DAC unlocking in the current period created a charge to earnings of $7.8
million.
|
| |  |  | Amortization in 2001 decreased by $.7 million or 8%, to $8.9 million.
This decline relates to 1) lower amortization of $.7 million from our
purchased insurance business, 2) $.4 million from lower surrenders and
3) $.4 million as a result of adopting FASB 133. These decreases were
offset by $.7 million of additional amortization related to annuity
sales in recent periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Commission expensesrepresent commission expenses, net of deferrable amounts.



| |  |  | During 2002, commission expenses decreased $2.7 million to $1.2
million primarily due to the termination of a marketing and
administration contract in 2002.                    
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   |  | During 2001, commission expenses increased $2.0 million to $3.9 million
primarily due to $1.1 million of additional commissions paid by Savers
Marketing due to increased sales.

Operating expensesconsist of general operating expenses, including salaries,
net of deferrable amounts.



| |  |  | In 2002, operating expenses increased $4.3 million or 40%, to $15.0
million. This increase is primarily due to $1.7 million related to the
development of our new U.S. Health Services subsidiary, $1.3 million
related to write off and legal costs related to the recovery of agency
receivable balances, and $.5 million of severance costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In 2001, operating expenses remained flat at $10.7 million.                                                                                                                                                                                                                                                                                    

Interest expense and financing costsrepresent interest expense incurred and
the amortization of related debt issuance costs.



| |  |  | In 2002, interest expense and financing costs increased by $.9
million or 25%, to $4.4 million. Average borrowings for the period
increased $4.4 million and included the impact from our Trust Preferred
Offering and our mortgage payable.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In 2001, interest expense and financing costs increased by $.1
million or 2%, to $3.5 million. Average borrowings for the period
increased $1.5 million primarily due to the Trust Preferred Offering
completed in August 2001.             

The weighted average interest rate for the 2002 and 2001 periods was 9.65%
and 9.72%, respectively.

Net realized investment gains (losses), net of related amortizationfluctuate
from period to period and generally arise when securities are sold in response
to changes in the investment environment. Realized investment gains (losses)
may affect the timing of the amortization of DAC and the amortization of the
PVFP.

28



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##### Table of Contents





| |  |  | Net realized investment losses for 2002, net of DAC amortization of
$9.9 million, were $10.0 million. The majority of the loss was
attributable to the write-downs on the value of collateralized debt
obligations due to increased default rates and securities in the energy
and telecommunications sectors.                                                                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Net realized investment losses for 2001, net of DAC amortization of
$3.8 million, were $6.5 million. The majority of the loss was
attributable to the sale of Enron bonds and write-downs on the value of
collateralized debt obligations due to increased default rates. In
addition, losses for the 2001 period included the write-off of an
investment in an internet based business.
|
| |   |  | We maintain a high quality investment portfolio with 97% and 95% of our
fixed maturity securities classified as investment grade securities as of
December 31, 2002 and 2001, respectively.                                                                                                                                                                                             

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##### Table of Contents



International operations (Discontinued operations):

|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |         |       |         | 
|--------------------------------------------------------------- | ------------------------- | - | ------------------------------------- | ------ | ---------------------- | ------ | ------- | ------ | ----- | ------ | ------- | ------- | ----- | ------- | 
|                                                                |                           |   |                                       |        | 2002                   |        | 2001    |        | 2000 
|                                                                |                           |   |                                       |        |                        |        |         |        |      
|                                                                |                           |   |                                       |        | (Dollars in thousands)
|Premiums and deposits collected:                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|                                                                | Traditional life          |   | $                                     | 18     |                        |        | $       | 57     |       |        | $       | 41      |      
|                                                                | Separate account deposits |   |                                       | 32,384 |                        |        |         | 74,364 |       |        |         | 170,514 |      
|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|                                                                |                           |   | Total premiums and deposits collected |        | $                      | 32,402 |         |        | $     | 74,421 |         |         | $     | 170,555 | 
|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|                                                               
|Statement of Operations:                                        |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|Premium income                                                  |                           | $ | 18                                    |        |                        | $      | 57      |        |       | $      | 41      |        
|Net investment income                                           |                           |   | 103                                   |        |                        |        | 461     |        |       |        | 498     |        
|Separate account fees                                           |                           |   | 3,569                                 |        |                        |        | 8,851   |        |       |        | 7,728   |        
|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|                                                                |                           |   | Total revenues                        |        |                        | 3,690  |         |        |       | 9,369  |         |         |       | 8,267   | 
|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|Benefits and claims                                             |                           |   | (186                                  | )      |                        |        | (254    | )      |       |        | 35      |        
|Amortization                                                    |                           |   | 272                                   |        |                        |        | 4,158   |        |       |        | 2,061   |        
|Commission expenses                                             |                           |   | 97                                    |        |                        |        | 184     |        |       |        | 12      |        
|Operating expenses                                              |                           |   | 1,889                                 |        |                        |        | 3,117   |        |       |        | 3,031   |        
|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|                                                                |                           |   | Total benefits and expenses           |        |                        | 2,072  |         |        |       | 7,205  |         |         |       | 5,139   | 
|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|                                                                |                           |   | Operating income before income taxes  |        | 1,618                  |        |         |        | 2,164 |        |         |         | 3,128 |        
|Net realized investment losses                                  |                           |   |                                      |        |                        |        | (783    | )      |       |        |        |        
|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|Operating income before gain on sale of discontinued operations |                           |   | 1,618                                 |        |                        |        | 1,381   |        |       |        | 3,128   |        
|Gain on sale of discontinued operations                         |                           |   | 6,872                                 |        |                        |        |        |        |       |        |        |        
|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|Income before income taxes                                      |                           | $ | 8,490                                 |        |                        | $      | 1,381   |        |       | $      | 3,128   |        
|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|                                                               
|Supplemental Information:                                       |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|Separate account contracts (1)                                  |                           |   | 0                                     |        |                        |        | 7,052   |        |       |        | 4,989   |        
|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        
|Separate account liabilities (1)                                |                           | $ | 0                                     |        |                        | $      | 401,097 |        |       | $      | 520,439 |        
|                                                                |                           |   |                                       |        |                        |        |         |        |       |        |         |        



|(1) |  | Primarily unit-linked assurance products. The sale of the International
Operations occurred in 2002 and as a result, there are no separate account
contracts or separate account liabilities at December 31, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

General: Our International Operations (Discontinued operations) include
revenues earned and expenses incurred from abroad, primarily Europe, and
include fees collected on our deposits from unit-linked assurance products.
The profitability of this segment primarily depends on the amount of our
separate account assets under management, the management fee charged on those
assets and management of our operating expenses.

Separate account depositsconsist of deposits from our unit-linked assurance
products. For GAAP these separate account deposits are not shown as premium
income in the income statement. A change in separate account deposits in a
single period does not cause our operating income to change, although continued
increases or decreases in separate account deposits may affect the growth rate
of separate account assets on which fees are earned.

30



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##### Table of Contents





| |  |  | During 2002, net deposits decreased
$42.0 million or 56%, to $32.4
million. The decrease in deposits is primarily due to the volatile
global equity environment and the sale of the International operations
in the second and third quarter of 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During 2001, net deposits decreased $96.2 million or 56%, to $74.4
million. The decrease in deposits is primarily due to the volatile
global equity environment, which has caused a shift in sales to
fixed-income based investments.                

Net investment incomerepresents income earned on our corporate assets such as
cash, short-term investments and fixed maturity securities. Standard Management
International is required to hold a certain level of cash and short-term
investments in order to comply with local insurance laws.



| |  |  | Net investment income was $.1 million in 2002 and $.5 million in
2001, respectively. Corporate assets averaged $5.3 million for 2002
and $12.1 million for 2001, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The net investment yields earned on average invested assets were
2.58%, 3.80% and 4.31% for the years ended 2002, 2001 and 2000,
respectively.                                

Fees from separate accountsrepresent the net fees earned on our unit-linked
assurance products. The fees include asset based administrative fees, premium
based administrative fees and the amortization of front end loads (deferred
revenue) into income. Asset based fees fluctuate in relation to separate
account assets, and premium based fees fluctuate in relation to premium
collections for certain products. Deferred revenue amortization fluctuates
subject to the amortization rules of SFAS 97.



| |  |  | During 2002, fees from separate accounts decreased $5.3 million or
60%, to $3.6 million. The decrease is primarily due to the sale of the
International operations in the second and third quarter of 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Amortizationincludes the amortization of deferred acquisition costs, such as
sales commissions and other costs, directly related to selling new business and
foreign exchange translation.



| |  |  | Amortization decreased $3.9 million in 2002 to $.3 million as a
result of the decline in fees from separate accounts, and is offset by a
corresponding decrease in deferred revenue amortization. The sale of
the international operations in the second and third quarter of 2002
contributed to the decrease in amortization.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commission expensesrepresent commission expenses, net of deferrable amounts.



| |  |  | Commission expenses were $.1 million and $.2 million for the years
ended December 31, 2002 and 2001. Due to the nature of our business,
most incurred commissions are deferred.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Operating expensesconsist of general operating expenses, including salaries,
net of deferrable amounts.



| |  |  | Operating expenses decreased $1.2 million or 40% in 2002, to $1.9
million primarily as a result of the sale of International Operations in
the second and third quarter of 2002.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net realized investment lossesgenerally arise when securities are sold in
response to changes in the investment environment.



| |  |  | There were no net realized investment losses for 2002. Net realized
investment losses, for 2001 were $.8 million due to the sale of a
security reflecting changes in market conditions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gain on sale of discontinued operations, net of related costsresults from the
sale of our International Operations in 2002.



| |  |  | We sold our International Operations which consisted of 100% of the
shares in Premier Life (Luxembourg) and the portfolio of Premier Life
(Bermuda) to Winterthur Life, a division of Credit Suisse Group,
resulting in a gain on the sale of discontinued operations of $6.9
million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Foreign currency translationcomparisons between 2002, 2001 and 2000 were
impacted by the strengthening and weakening of the U.S. dollar relative to
foreign currencies, primarily the Luxembourg Franc and the Euro. The
impact of these translations has been quantified on fees from separate accounts and
amortization.

Liquidity and Capital Resources

Liquidity of Standard Management (Parent Company)

Standard Management is a financial services holding company whose
liquidity requirements are met through payments received from our subsidiaries.
These payments include 1) surplus debenture interest, 2) dividends, 3)
management fees, 4) equipment rental fees, 5) lease income and 6) allocation of
taxes through a tax sharing agreement, all of which are subject to restrictions
under applicable insurance laws and are used to pay our operating expenses and
meet our debt service obligations. These internal sources of liquidity have
been supplemented in the past by external sources such as revolving credit
agreements and long-term debt and equity financing in the capital markets.

Potential Cash Available for 2003

We anticipate that available cash from our existing working capital,
surplus debenture interest, dividends, management fees, rental income and tax
sharing payments will be more than adequate to meet our anticipated parent
company cash requirements for 2003. The following describes our potential
sources of cash in 2003.

Surplus Debenture Interest.We loaned $27.0 million to Standard Life
pursuant to unsecured surplus debenture agreements (surplus debentures) which
requires Standard Life to make quarterly interest payments at a variable
corporate base rate plus 2% per annum, and annual principal payments of $1.0
million per year beginning in 2007 and concluding in 2033. The interest and
principal payments are subject to quarterly approval by the Indiana Department
of Insurance, depending upon satisfaction of certain financial tests relating
to levels of Standard Lifes capital and surplus and general approval of the
Commissioner of the Indiana Department of Insurance. We currently anticipate
these quarterly approvals will be granted. Assuming the approvals are granted
and the December 31, 2002 interest rate of 6.25% continues, we expect to
receive interest income of $1.8 million from the surplus debentures in 2003.

Dividendspaid from Standard Life are limited by laws applicable to
insurance companies. As an Indiana domiciled insurance company, Standard Life
may pay a dividend or distribution from its surplus profits, without the prior
approval of the Commissioner of the Indiana Department of Insurance, if the
dividend or distribution, together with all other dividends and distributions
paid within the preceding twelve months, does not exceed the greater of 1) net
gain from operations or 2) 10% of surplus, in each case as shown in its
preceding annual statutory financial statements. In 2002, there were no
dividends received from our subsidiaries. In 2001, we received dividends of
$1.6 million and $.5 million from Standard Life and Savers Marketing,
respectively. In 2003, we could receive dividends of approximately $5.6
million from Standard Life, without regulatory approval; however, the payment
of dividends will require approval from SCOR Life U.S. Insurance Company, a
reinsurer of Standard Life.

Management Fees. Pursuant to a management services agreement, Standard
Life paid $3.0 million during 2002 for certain management services related to
the production of business, investment of assets and evaluation of
acquisitions. In addition, Dixie Life paid Standard Life $1.1 million in 2002,
respectively, for certain management services provided. Both of these
agreements provide that they may be modified or terminated by the applicable
Departments of Insurance in the event of financial hardship of Standard Life or
Dixie Life. In 2003, we expect to receive management fees of $3.6 million
from Standard Life.

Equipment Rental Fees.In 2002, we received $1.1 million from Standard
Life for the use of our equipment and we expect to receive the same amount in
2003.

Lease Income.Effective January 1, 2002, we entered into a lease
agreement with Standard Life whereby Standard Life will lease approximately
46,000 square feet of our office space located at 10689 North Pennsylvania
Street. During 2002, we received approximately $.8 million in lease income
from Standard Life and we expect to receive the same amount in 2003.

Tax Sharing Payments.Effective January 1, 2000 we entered into a tax
sharing agreement with Savers Marketing and Standard Management International
that allocates the consolidated federal income tax liability. In 2002, Savers
Marketing paid $.1 million and Standard Management paid $.6 million in
accordance with this agreement. In 2001, Savers

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##### Table of Contents



Marketing paid $.4 million and Standard Management International recovered
$.1 million in accordance with this agreement. Standard Management
International terminated its participation in this agreement with the sale of
our International Operations.

Estimated Cash Required in 2003

The following are the characteristics of our mortgage payable, promissory
note, notes payable and trust preferred securities, including estimated
required payments in 2003.

Mortgage Payable:

The following are characteristics of our mortgage payable agreement at
December 31, 2002:



| |  |  | outstanding balance of $6.8 million;                                                              
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | interest rate of 7.375% per annum;                                                                
|
| |  |  | principal and interest payments: $56 thousand per month through December, 2011;                   
|
| |  |  | interest payments required in 2003 based on current balances will be $.5 million;                 
|
| |  |  | note may be prepaid on or before January, 2005 at 105% and declining to 101% after December, 2008.

Notes Payable:

The following are characteristics of our promissory note at December 31, 2002:



| |  |  | outstanding balance of $.5 million;                                                                                                            
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | interest rate of 6.0% per annum;                                                                                                               
|
| |  |  | principal and interest payments: $30 thousand interest per year in
2003 and 2004; principal payments thereafter beginning in 2005 through
2007;
|
| |  |  | interest payments required in 2003 based on current balances will be $30 thousand.                                                             

The following are characteristics of our amended credit agreement at December 31, 2002:



| |  |  | outstanding balance of $1.5 million;                                                                                                                                                                                                      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | weighted average interest rate of 4.91%;                                                                                                                                                                                                  
|
| |  |  | principal payments: $.6 million paid in March 2002, $3.75 million
paid in September 2002, $2.0 million paid in October 2002 and $.25
million paid in December 2002. The remaining principal payment of $1.5
million is due in August 2003.
|
| |  |  | subject to certain restrictions and financial and other covenants;                                                                                                                                                                        
|
| |  |  | interest payments required in 2003 based on current balances will be $18 thousand.                                                                                                                                                        

The following are characteristics of our subordinated debt agreement at December 31, 2002:



| |  |  | outstanding balance of $11.0 million;                                                                           
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | interest rate is greater of 1) 10% per annum or 2) six month London
Inter-Bank Offered Rate (LIBOR) plus 1.5%;
|
| |  |  | due October 2007;                                                                                               
|
| |  |  | interest payments required in 2003 based on current balances will be $1.1 million.                              

Trust Preferred Securities:These securities represent an undivided
beneficial interest in the assets of SMAN Capital Trust I, a Delaware business
trust organized to purchase our junior subordinated debentures and issue
preferred securities. The assets of the Trust consist solely of the debentures
which were purchased by the Trust with the proceeds of the offering. On August
9, 2001, the Trust completed a public offering of $20.7 million of its 10.25%
preferred securities. The Trust used

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the proceeds of this offering to purchase our 10.25% junior subordinated
debentures. Net proceeds from the sale of the debentures of approximately
$19.3 million were used to redeem our Series A preferred stock of $6.5 million
and repay $7.3 million of our notes payable. The remaining proceeds were used
for general corporate purposes.

The following are characteristics of our trust preferred securities at
December 31, 2002:



| |  |  | outstanding balance of $20.7 million;                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------
|
| |  |  | annual distribution rate of 10.25%; distributions may be deferred up to 20 consecutive quarters;         
|
| |  |  | matures August 9, 2031;                                                                                  
|
| |  |  | may be redeemed on or after August 9, 2006 at $10 per security plus accumulated and unpaid distributions;
|
| |  |  | distributions required in 2003 based on current balances will be $2.1 million;                           
|
| |  |  | distributions are classified as interest expense.                                                        

General:On a consolidated basis we reported net cash provided by
operations of $18.4 million and $8.0 million for 2002 and 2001, respectively.
Although deposits received on our interest-sensitive annuities and other
financial products are not included in cash flow from operations under GAAP,
these funds are available. Cash provided by operations plus net deposits
received, less net account balances returned to policyholders on interest
sensitive annuities and other financial products, resulted in positive cash
flow of $469.0 million and $222.0 million for 2002 and 2001, respectively. Cash
generated on a consolidated basis is available only to the extent that it is
generated at the holding company level or is available through interest,
dividends, management fees or other payments from our subsidiaries.

At February 1, 2003, we had parent company only cash and short-term
investments of $2.0 million. These funds are available for general corporate
purposes. Our parent company only operating expenses (not including interest
expense) were $5.5 million and $4.3 million for 2002 and 2001, respectively.

Liquidity of Insurance Operations

U.S. Insurance Operations.The principal liquidity requirements of
Standard Life are its 1) contractual obligations to policyholders, 2) surplus
debenture interest, dividends, management fees and rental fees to Standard
Management and 3) operating expenses. The primary source of funding for these
obligations has been cash flow from premium income, net investment income,
investment sales and maturities and sales of annuity products. These sources of
liquidity for Standard Life significantly exceed scheduled uses. Liquidity is
also affected by unscheduled benefit payments including death benefits, policy
withdrawals and surrenders. The amount of withdrawals and surrenders is
affected by a variety of factors such as renewal interest crediting rates,
interest rates for competing products, general economic conditions, Standard
Lifes A.M. Best rating and events in the industry that affect policyholders
confidence. In August 2002, Standard Life received a rating from A.M. Best of
(B+), or very good category, a one-category reduction from its previous
rating of (B++) (Very Good). A.M. Best cited rapid growth in the annuity
business, modest risk-adjusted capitalization and high exposure to below
investment grade bonds as a percentage of capital and surplus, as the primary
reasons for the rating change.

The policies and annuities issued by Standard Life contain provisions that
allow policyholders to withdraw or surrender their policies under defined
circumstances. These policies and annuities generally contain provisions, which
apply penalties or otherwise restrict the ability of policyholders to make such
withdrawals or surrenders. Standard Life closely monitors the surrender and
policy loan activity of its insurance products and manages the composition of
its investment portfolios, including liquidity, to ensure it has sufficient
cash resources in light of such activity.

Changes in interest rates may affect our incidence of policy surrenders
and other withdrawals. In addition to the potential effect on liquidity,
unanticipated withdrawals in a changing interest rate environment could
adversely affect our earnings if we were required to sell investments at
reduced values to meet liquidity demands. We manage our asset and liability
portfolios in order to minimize the adverse earnings effect of changing market
interest rates. We seek assets that have duration characteristics similar to
the liabilities that they support. We also prepare cash flow projections and
perform cash flow tests under various market interest rate scenarios to assist
in evaluating liquidity needs and adequacy. Our U.S. insurance subsidiaries
currently expect available liquidity sources and future cash flows to be
adequate to meet the demand for funds.

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Statutory surplus is computed according to rules prescribed by the NAIC as
modified by the Indiana Department of Insurance, or the state in which our
insurance subsidiaries do business. Statutory accounting rules are different
from GAAP and are intended to reflect a more conservative perspective. With
respect to new business, statutory accounting practices require that: 1)
acquisition costs (primarily commissions and policy issue costs) and 2)
reserves for future guaranteed principal payments and interest in excess of
statutory rates, be expensed in the year the new business is written. These
items cause a reduction in statutory surplus or surplus strain in the year
written for many insurance products. We design our products to minimize such
first-year losses, but certain products continue to cause a statutory loss in
the year written. Our long-term growth goals contemplate continued growth in
our insurance businesses. To achieve these growth goals, our U.S. insurance
subsidiaries will need to increase statutory surplus. Additional statutory
surplus may be secured through various sources such as internally generated
statutory earnings, infusions with funds generated through our debt or equity
offerings, or mergers with other life insurance companies. If additional
capital is not available from one or more of these sources, we believe that we
could reduce surplus strain through the use of reinsurance or through reduced
writing of new business.

We believe that the operational cash flow of Standard Life will be
sufficient to meet our anticipated needs for 2003. As of December 31, 2002,
Standard Life had statutory capital and surplus for regulatory purposes of
$58.9 million. As the annuity business produced by Standard Life increases,
Standard Life expects to satisfy statutory capital and surplus requirements
through statutory profits and through additional capital contributions by
Standard Management. Net cash flow from operations on a statutory basis of
Standard Life, after payment of benefits and operating expenses, was $343.2
million and $159.2 million for 2002 and 2001, respectively. If the need
arises for cash, which is not readily available, additional liquidity could be
obtained from the sale of invested assets.

Factors That May Affect Future Results

We are subject to a number of factors affecting our business, including intense
competition in the industry and the ability to attract and retain agents and
employees. If we are unable to respond appropriately to any of these factors,
business and financial results could suffer.

Our operating results are affected by many factors, including
competition, lapse rates, interest rates, maintenance of insurance ratings,
governmental regulation and general business conditions, many of which are
outside our control.

We operate in a highly competitive environment and are in direct
competition with a large number of insurance companies, many of which offer a
greater number of products through a greater number of agents and have greater
resources. In addition, we may be subject, from time to time, to new
competition resulting from additional insurance carriers introducing products
similar to those offered by us. Moreover, as a result of recent federal
legislation, commercial banks, insurance companies, and investment banks may
now combine, provided certain requirements are satisfied, and we expect to
encounter increased competition from these providers of financial services.
This competitive environment could result in lower premiums, loss of sales and
reduced profitability.

Our management believes that the ability to compete is dependent upon,
among other things, the ability to retain and attract independent general
agents to market products and the ability to develop competitive products that
also are profitable. Although management believes that good relationships with
our independent general agents exist, competition for those agents among
insurance companies is intense. Our independent general agents typically
represent other insurance companies and may sell products that compete with
our products. Sales of our annuity products and, therefore, our results of
operations and financial condition may be adversely affected if we are
unsuccessful in attracting and retaining independent agents and marketing
organizations. See Business of Standard ManagementCompetition.

Our success also depends upon the continued contributions of key officers
and employees. Should one or more of these individuals leave or otherwise
become unavailable for any reason, business and results of operations could be
materially adversely affected. See Business of Standard
Management-Employees.

Financial results could suffer if our A.M. Best ratings are downgraded.

Insurers compete with other insurance companies, financial intermediaries
and other institutions on the basis of a number of factors, including the
ratings assigned by A.M. Best. A.M. Best assigns ratings labeled (A++)
through (F) (Superior, Excellent, Very Good, Fair, Marginal,
Weak, Poor, Under Regulatory Supervision, and In Liquidation).
Standard Life and Dixie Life have a rating of (B+) (Very Good) and (B)
(Fair), respectively, by A.M. Best. A.M. Bests ratings represent their
opinion based on a comprehensive quantitative and qualitative review of our

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financial strength, operating performance and market profile. A rating of
(B+) is assigned by A.M. Best to companies that, in their opinion, have
achieved very good overall performance when compared to the standards
established by A.M. Best, and have a good ability to meet their obligations to
policyholders over a long period of time. A rating of (B) is assigned by
A.M. Best to companies that, in their opinion, have achieved good overall
performance when compared to the standards established by A.M. Best.
According to A.M. Best, these companies generally have an adequate ability to
meet their obligations to policyholders, but their financial strength is
vulnerable to unfavorable changes in underwriting or economic conditions. In
evaluating a companys financial and operating performance, A.M. Best reviews
the companys profitability, leverage and liquidity as well as the companys
book of business, the adequacy and soundness of its reinsurance, the quality
and estimated market value of its assets, the adequacy of its reserves, and
the experience and competence of its management. A.M. Best reviews its
ratings of insurance companies from time to time. If the A.M. Best ratings
were downgraded, sales of annuity products could be significantly impacted and
the financial condition and results of operations could be materially
adversely affected. See Business of Standard Management-Competition.

Changes in governmental regulation and legislation could have a substantial
impact on our profitability.

Our insurance subsidiaries are subject to substantial governmental
regulation in each of the jurisdictions in which they conduct business.
Changes in these regulations could have a significant impact on our
profitability. The primary purpose of these regulations is to protect
policyholders, not investors. These regulations are vested in governmental
agencies having broad administrative power with respect to all aspects of our
insurance business, including premium rates, policy forms and applications,
marketing illustrations, dividend payments, capital adequacy and the amount and
type of investments we may have.

The NAIC, and state insurance regulators continually reexamine existing
laws and regulations and their application to insurance companies. Changes in
the NAIC or state regulations, including, for example, changes in the
risk-based capital requirements, which are determined by the NAIC and state
regulators, could affect the ability of our subsidiaries to pay dividends to us
which could affect our ability to make payments to you.

In addition, the federal government has become increasingly involved with
insurance regulation in recent years, including the passage of the
Gramm-Leach-Bliley Act, and more comprehensive federal legislation in this area
is still being considered by Congress. Federal legislation and administrative
policies in several areas, including pension regulation, age and sex
discrimination, financial services regulation and federal taxation, affect us
specifically and the insurance business in general. New state or federal laws
or regulations, as well as a more strict interpretation of existing laws or
regulations, may adversely affect our current claims exposure, adversely affect
the profitability of our current and future products, and materially affect our
future operations by increasing the costs of regulatory compliance. We cannot
predict the impact of future state or federal laws or regulations on our
business. See Business of Standard Management  Regulatory Factors.

Interest rate fluctuations could negatively affect spread income.

Significant changes in interest rates expose insurance companies to the
risk of not earning anticipated spreads between the interest rate earned on
investments and the credited interest rates paid on outstanding policies. Both
rising and declining interest rates can negatively affect spread income.
Although we develop and maintain asset/liability management programs and
procedures designed to preserve spread income in rising or falling interest
rate environments, changes in interest rates could adversely affect these
spreads.

Our financial results are highly dependent on the financial condition of the
companies in which we make investments and could suffer if the value of our
investments decreases due to factors beyond our control.

Our invested assets, approximately $1.4 billion, represented approximately
82% of our total assets at December 31, 2002. These investments are subject to
customary risks of credit defaults and changes in market values. In addition,
the value of our investment portfolio depends in part on the financial
condition of the companies in which we have made investments. Factors beyond
our control, including interest rate levels, financial market performance, and
general economic conditions may have a significant negative impact on our
investment income and the value of our investment assets, which would have a
material adverse affect on our financial condition.

Our substantial reliance on reinsurers could cause our financial results to
suffer.

We are able to assume insurance risks beyond the level which our capital
and surplus would support by transferring substantial portions of risks to
other, larger insurers through reinsurance contracts. Approximately 70% of our
life insurance

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in force and 6% of our annuity policy liabilities have risks that we have
reinsured through reinsurance contracts. However, these reinsurance
arrangements leave us exposed to credit risk, which exists because reinsurance
does not fully relieve us of our liability to our policyholders for the portion
of the risks ceded to reinsurers. This liability may exceed our established
reserves, which would have a significant negative affect on our net income. In
addition, reinsurance may not continue to be available to us at commercially
reasonable rates. If reinsurance is not available to us in the future, the
amounts we reserve as liabilities for payment of claims would significantly
increase and the amount and value of policies we sell would significantly
decrease, which would have a material adverse effect on our business and
operating results.

Our policy claims fluctuate from year to year, and future benefit payments may
exceed our established reserves, which would cause our earnings to suffer.

Our earnings are significantly dependent upon the extent to which the
actual claims received by our subsidiaries is consistent with the actuarial
assumptions we use in establishing reserves for the payment of benefit claims.
To the extent that the actual claims experience of our subsidiaries exceeds our
established reserves, our operating income would be negatively affected,
resulting in an adverse effect on our earnings.

Volatility in benefit claims is common in the life insurance industry.
While our reserves have been sufficient to cover policy claims in the past and
we attempt to limit the risk by carefully underwriting new policies and sharing
risks with reinsurance companies, we may still experience a period of higher
than anticipated benefit claims that exceeds our established reserves. If this
were to happen, it could result in increased operating losses.

Because a significant portion of our annuity contracts are surrenderable, any
substantial increase in the level of surrenders could negatively affect
financial results.

As of December 31, 2002, approximately 84% or $1.1 billion of annuity
contracts in force (measured by statutory reserves) were surrenderable.
Approximately 8% of those contracts or approximately $109 million of annuity
contracts in force (measured by statutory reserves) are surrenderable without
charge. Changes in prevailing interest rates, ratings or other factors which
result in or lead to significant levels of surrenders of existing annuity
contracts could have a material adverse effect on our financial condition and
results of operations. Surrenders result in a reduction of invested assets
that earn investment income and a reduction of policyholder account balances
that credit interest.

Our financial results could be materially adversely affected if our assumptions
regarding the value of intangible assets prove to be incorrect.

Included in our financial statements are certain assets that are primarily
valued, for financial statement purposes, on the basis of managements
assumptions. These assets include items such as:



| |  |  | deferred policy acquisition costs;            
| | - |  | ----------------------------------------------
|
| |  |  | present value of future profits;              
|
| |  |  | goodwill; and                                 
|
| |  |  | organization and deferred debt issuance costs.

The assumptions are based upon, among others, interest rate spread and
rates of mortality, surrender and lapse. If, for instance, future mortality
rates were higher than expected, projected margins would be lower and deferred
policy acquisition cost amortization would increase. The value of these assets
reflected in our December 31, 2002 balance sheet totaled $175 million, or 10%
of our assets. Although we have established procedures to periodically review
the assumptions used to value these assets and determine the need to make
adjustments, if our assumptions are incorrect and adjustments need to be made,
our financial results could be materially adversely affected.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

We seek to invest available funds in a manner that will maximize
shareholder value and fund future obligations to policyholders and debtors,
subject to appropriate risk considerations. Many of our products incorporate
surrender charges, market interest rate adjustments or other features to
encourage persistency. Approximately 77% of the total insurance

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liabilities at December 31, 2002 had surrender penalties or other
restrictions and approximately 16% are not subject to surrender.

We also seek to maximize the total return on our investments through
active investment management. Accordingly, we have determined that the entire
portfolio of fixed maturity securities is available to be sold in response to:



| |  |  | changes in market interest rates;                                     
| | - |  | ----------------------------------------------------------------------
|
| |  |  | changes in relative values of individual securities and asset sectors;
|
| |  |  | changes in prepayment risks;                                          
|
| |  |  | changes in credit quality outlook for certain securities;             
|
| |  |  | liquidity needs; and                                                  
|
| |  |  | other factors.                                                        

Profitability of many of our products is significantly affected by the
spreads between interest yields on investments and rates credited on insurance
liabilities. Although substantially all credited rates on annuity products may
be changed annually (subject to minimum guaranteed rates), changes in
competition and other factors, including the impact of the level of surrenders
and withdrawals, may limit the ability to adjust or to maintain crediting rates
at levels necessary to avoid narrowing of spreads under certain market
conditions. As of December 31, 2002, the average yield, computed on the cost
basis of the investment portfolio, was 6.53%, and the average interest rate
credited or accruing to total insurance liabilities was 4.23%, excluding
guaranteed interest bonuses for the first year of the annuity contract.

Computer models were used to perform simulations of the cash flows
generated from our existing business under various interest rate scenarios.
These simulations measured the potential gain or loss in fair value of interest
rate-sensitive financial instruments. With such estimates, we seek to closely
match the duration of assets to the duration of liabilities. When the estimated
duration of assets and liabilities are similar, exposure to interest rate risk
is minimized because a change in the value of assets should be largely offset
by a change in the value of liabilities. At December 31, 2002, the option
adjusted duration of fixed maturity securities and short-term investments were
approximately 3.9, and the option adjusted duration of insurance liabilities
was approximately 3.9. The option adjusted duration compares the change in
the value of an asset or liability with a change in interest rates. This means
that if interest rates in general increased 1%, the value of our asset
portfolio would decrease by approximately 3.9%.

If interest rates were to increase by 10% from their December 31, 2002
levels, our fixed maturity securities and short-term investments (net of the
corresponding changes in the values of cost of policies purchased, cost of
policies produced and insurance liabilities) would decline in fair value by
approximately $21.4 million.

The calculations involved in our computer simulations incorporate numerous
assumptions, require significant estimates and assume an immediate change in
interest rates without any management of the investment portfolio in reaction
to such change. Consequently, potential changes in the value of our financial
instruments indicated by the simulations will likely be different from the
actual changes experienced under given interest rate scenarios, and the
differences may be material. Because our investments and liabilities are
actively managed, actual losses could be less than those estimated above.

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Item 8. Consolidated Financial Statements and Supplementary Data

The financial statements and supplementary data required with respect to
this Item 8 are listed in Item 15(a)(1) and included in a separate section of
this report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

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PART III

The Registrant will file a definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with our
2003 Annual Meeting of Shareholders, (the Proxy Statement) not later than 120
days after the end of the fiscal year covered by this report, and certain
information included therein is incorporated herein by reference. Only those
sections of the Proxy Statements that specifically address the items set forth
herein are incorporated by reference. Such incorporation does not include the
Compensation Committee Report or the Performance Graph included in the Proxy
Statement.

Item 10. Directors and Executive Officers of the Registrant

The information
concerning our directors and executive officers required by this item is
incorporated by reference to our Proxy Statement.

The information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934 is to be set forth in the Proxy Statement and is hereby
incorporated by reference.

Item 11. Executive Compensation

The information required by this Item is incorporated by reference to our Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is incorporated by reference to our Proxy Statement.

Item 13. Certain Relationship and Related Transactions

The information required by this Item is incorporated by reference to our
Proxy Statement.

Item 14. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-4c under the Securities Exchange Act of 1934) as of a date within 90 days
of the filing date of this Report on Form 10-K (the Evaluation Date). They
have concluded that, as of the Evaluation Date, our disclosure controls and
procedures were adequate and effective. There were no significant changes in
our internal controls or in other factors that could significantly affect
disclosure controls and procedures subsequent to the Evaluation Date.

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PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1) and (2) The response to this portion of Item 15 is submitted as a
separate section of this report.

(a)(3) List of Exhibits:

|        |  |                                                                                                                                                                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                     
|Number  |  | Description of Document                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                     
|2.1     |  | Purchase Agreement by and between Standard Management and
Winterthur Life, dated May 28, 2002 (incorporated by reference to
Standard Managements Quarterly Report on Form 10-Q (File No.
0-20882) for the quarter ended September 30, 2002).                                                       
|2.2     |  | Fleet Consent of Purchase Agreement between Standard Management
and Winterthur Life, dated May 20, 2002 (incorporated by reference
to Standard Managements Quarterly Report on Form 10-Q (File No.
0-20882) for the quarter ended September 30, 2002).                                             
|2.3     |  | Zurich Consent of Purchase Agreement between Standard Management
and Winterthur Life, dated May 8, 2002 (incorporated by reference
to Standard Managements Quarterly Report on Form 10-Q (File No.
0-20882) for the quarter ended September 30, 2002).                                             
|2.4     |  | Amendment to Purchase Agreement by and between Standard Management
and Winterthur Life, dated August 9, 2002 (incorporated by
reference to Standard Managements Quarterly Report on Form 10-Q
(File No. 0-20882) for the quarter ended September 30, 2002).                                        
|3.1     |  | Amended and Restated Articles of Incorporation, as amended
(incorporated by reference to Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1996).                                                                                                                       
|3.2     |  | Amended and Restated Bylaws as amended (incorporated by reference
to Registration Statement on Form S-1 (Registration No. 33-53370)
as filed with the Commission on January 27, 1993 and to Exhibit 3
of Quarterly Report on Form 10-Q (File No. 0-20882) for the quarter
ended September 30, 1994).
|4.1     |  | Certificate of Trust of SMAN Capital Trust I (incorporated by
reference to Registration Statement on Form S-1 (Registration No.
333-60886))                                                                                                                                                         
|4.2     |  | Trust Agreement of SMAN Capital Trust I (incorporated by
reference to Registration Statement on Form S-1 (Registration No.
333-60886))                                                                                                                                                              
|4.3     |  | Form of Amended and Restated Trust Agreement of SMAN Capital Trust
I among Standard Management, Bankers Trust Company and Bankers
Trust (Delaware) (incorporated by reference to Registration
Statement on Form S-1 (Registration No. 333-60886))                                                   
|4.4     |  | Form of Preferred Securities Certificates (incorporated by
reference to Registration Statement on Form S-1 (Registration No.
333-60886))                                                                                                                                                            

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|        |  |                                                                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                 
|Number  |  | Description of Document                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                 
|4.5     |  | Form of Junior Subordinated Indenture between Standard Management
and Bankers Trust Company (incorporated by reference to
Registration Statement on Form S-1 (Registration No. 333-60886))                                                                                      
|4.6     |  | Form of Junior Subordinated Debenture (incorporated by reference
to Registration Statement on Form S-1 (Registration No. 333-60886))                                                                                                                                            
|4.7     |  | Form of Preferred Securities Guarantee Agreement between Standard
Management and Bankers Trust Company (incorporated by reference to
Registration Statement on Form S-1 (Registration No. 333-60886))                                                                           
|4.8     |  | Form of Senior Note Agreement Warrant (incorporated by reference
to Registration Statement on Form S-1 (Registration No. 33-53370)).                                                                                                                                            
|4.9     |  | Amended and Restated Registration Rights Agreement dated as of
April 15, 1997 by and between Standard Management and Fleet
National Bank (incorporated by reference to Annual Report on Form
10-K (File No. 0-20882)).                                                          
|4.10    |  | Form of Fleet National Bank Warrant (incorporated by reference to
Annual Report on Form 10-K (File No. 0-20882)).                                                                                                                                                               
|4.11    |  | Form of Presidents Club Warrant (incorporated by reference to
Annual Report on Form 10-K (File No. 0-20882)).                                                                                                                                                                  
|10.1*   |  | Third Amended and Restated Employment Contract by and between
Standard Management and Ronald D. Hunter, dated and effective, as
amended, July 1, 1999 (incorporated by reference to Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1999). 
|10.2*   |  | Third Amended and Restated Employment Contract by and between
Standard Management and Edward T. Stahl, dated and effective, as
amended, July 1, 1999 (incorporated by reference to Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1999).  
|10.3*   |  | Third Amended and Restated Employment contract by and between
Standard Management and Raymond J. Ohlson, dated and effective, as
amended, July 1, 1999 (incorporated by reference to Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1999).
|10.4*   |  | Second Amended and Restated Employment Contract by and between
Standard Management and Stephen M. Coons dated and effective, as
amended, July 1, 1999 (incorporated by reference to Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1999). 
|10.5*   |  | Indemnification Agreement between Standard Management and Stephen
M. Coons and Coons & Saint, dated August 1, 1991 (incorporated by
reference to Registration Statement on Form S-1 (Registration No.
33-53370) as filed with the Commission on January 27, 1993).              

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                  
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                  
|Number  |  | Description of Document                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                  
|10.6*   |  | Standard Management Amended and Restated 1992 Stock Option Plan
(incorporated by reference to Registration Statement on Form S-4
(Registration No. 333-35447) as filed with the Commission on
September 11, 1997.                                                                                                                                                                
|10.7    |  | Lease by and between Standard Life and Standard Management, dated
December 28, 2001.                                                                                                                                                                                                                                                                                             
|10.8    |  | Management Service Agreement between Standard Life and Standard
Management dated August 1, 1992, as amended on January 1, 1997 and
as further amended on January 1, 1999 (incorporated by reference to
Annual Report on Form 10-K (File No. 0-20882)).                                                                                                                           
|10.9    |  | Agreement for Assumption Reinsurance between the National
Organization Of Life and Health Insurance Guaranty Associations and
Standard Life, concerning, The Midwest Life Insurance Company In
Liquidation effective June 1, 1992 (incorporated by reference to
Registration Statement on Form S-1 (Registration No. 33-53370) as
filed with the Commission on January 27, 1993).
|10.10   |  | Reinsurance Agreement between Standard Life and Swiss Re Life and
Health effective May 1, 1975 (incorporated by reference to
Registration Statement on Form S-1 (Registration No. 33-53370) as
filed with the Commission on January 27, 1993).                                                                                                                                   
|10.11   |  | Reinsurance Agreement between Firstmark Standard Life Insurance
Company and Swiss Re Life and Health effective February 1, 1984
(incorporated by reference to Registration Statement on Form S-1
(Registration No. 33-53370) as filed with the Commission on January
27, 1993).                                                                                                  
|10.12   |  | Reinsurance Contract between First International and Standard
Life dated July 10, 1992 (incorporated by reference to Registration
Statement on Form S-1 (Registration No. 33-53370) as filed with the
Commission on January 27, 1993).                                                                                                                                           
|10.13   |  | Amended Reinsurance Agreement between Standard Life and
Winterthur Life Re Insurance Company effective January 1, 1995
(incorporated by reference to Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1996).                                                                                                                                        
|10.14   |  | Management Service Agreement between Premier Life (Luxembourg)
and Standard Management dated September 30, 1994 (incorporated by
reference to Annual Report on Form 10-K (File No. 0-20882) for the
year ended December 31, 1994).                                                                                                                                               
|10.15   |  | Assignment of Management Contract dated October 2, 1995 of
Management Contract dated January 1, 1987 between DNC and Dixie
Life to Standard Life (incorporated by reference to Annual Report
on Form 10-K (File No. 0-20882) for the year ended December 31,
1996).                                                                                                              
|10.16   |  | Automatic Indemnity Reinsurance Agreement between First
International and The Guardian Insurance & Annuity Company, Inc.
dated and effective January 1, 1996 (incorporated by reference to
Annual Report on Form 10-K (File No. 0-20882) for the year ended
December 31, 1996).                                                                                                  

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|        |  |                                                                                                                                                                                                                                                                          
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                          
|Number  |  | Description of Document                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                          
|10.17   |  | Indemnity Retrocession Agreement between The Guardian Insurance &
Annuity Company, Inc. and Standard Life dated and effective January
1, 1996 (incorporated by reference to Annual Report on Form 10-K
(File No. 0-20882) for the year ended December 31, 1996).         
|10.18   |  | Automatic Indemnity Reinsurance Agreement between The Guardian
Insurance & Annuity Company, Inc. and Standard Life dated and
effective January 1, 1996 (incorporated by reference to Annual
Report on Form 10-K (File No. 0-20882) for the year ended December
31, 1996).
|10.19   |  | Administrative Services Agreement between First International and
Standard Life dated and effective March 18, 1996 (incorporated by
reference to Annual Report on Form 10-K (File No. 0-20882) for the
year ended December 31, 1996).                                    
|10.20   |  | Amendment No. 1 to Amended and Restated Revolving Line of Credit
Agreement dated as of March 10, 1998 between Standard Management
and Fleet National Bank (incorporated by reference to Quarterly
Report on Form 10-Q (File No. 0-20882)).                               
|10.21   |  | Amended and Restated Note Agreement dated as of March 10, 1998
between Standard Management and Fleet National Bank in the amount
of $20,000,000 (incorporated by reference to Quarterly Report on
Form 10-Q (File No. 0-20882)).                                         
|10.22   |  | Amended and Restated Pledge Agreement dated as of March 10, 1998
between Standard Management and Fleet National Bank (incorporated
by reference to Quarterly Report on Form 10-Q (File No. 0-20882)).                                                                    
|10.23   |  | Surplus Debenture dated as of November 8, 1996 by and between
Standard Management and Standard Life in the amount of $13,000,000
(incorporated by reference to Quarterly Report on Form 10-Q (File
No. 0-20882) for the quarter ended September 30, 1996).               
|10.24   |  | Portfolio Indemnify Reinsurance Agreement between Dixie Life and
Cologne Life Reinsurance Company dated and effective December 31,
1997 (incorporated by reference to Annual Report on Form 10-K (File
No. 0-20882) for the year ended December 31, 1996).               
|10.25   |  | Coinsurance Agreement effective as of July 1, 1997 by and between
Savers Life and World Insurance Company (incorporated by reference
to Registration Statement on Form S-4 (Registration No.
333-35447)).                                                                
|10.26   |  | Amendment I to the Guardian Indemnity Retrocession Agreement
effective as of January 1, 1996 by and between The Guardian
Insurance and Annuity Company and Standard Life (incorporated by
reference to Registration Statement on Form S-4 (Registration No.
333-35447)). 
|10.27   |  | Promissory Note from Ronald D. Hunter to Standard Management in
the amount of $775,500 executed October 28, 1997 (incorporated by
reference to Quarterly Report on Form 10-Q (File No. 0-20882) for
the quarter ended September 30, 1997).                               

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|        |  |                                                                                                                                                                                                                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                              
|Number  |  | Description of Document                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                              
|10.28   |  | Reinsurance Agreement between Standard Life and Life Reassurance
Corporation of America effective September 1, 1997 (incorporated by
reference to Annual Report on Form 10-K (File No. 0-20882) for the
year ended December 31, 1997).                                                       
|10.29   |  | Reinsurance Agreement between Standard Life and Business Mens
Assurance Company of America effective September 1, 1997
(incorporated by reference to Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1997).                                                   
|10.30   |  | Indemnity Reinsurance Agreement between Standard Life and the
Mercantile and General Life Reassurance Company of America dated
March 30, 1998 and effective June 1, 1997 (incorporated by
reference to Quarterly Report on Form 10-Q (File No. 0-20882) for
the quarter ended June 30, 1998).
|10.31   |  | Quota Share Reinsurance Agreement between Savers Life and the
Oxford Life Insurance Company dated September 24, 1998 and
effective July 1, 1998 (incorporated by reference to Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1998).                    
|10.32   |  | Addendum No. 5 to Reinsurance Agreement between Standard Life and
Winterthur Life Re Insurance Company dated August 20, 1998 and
effective October 1, 1998 (incorporated by reference to Quarterly
Report on Form 10-Q (File No. 0-20882) for the quarter ended
September 30, 1998).         
|10.33   |  | Amended and Restated Note Agreement dated as of September 24,
1998 between Standard Management and Fleet National Bank in the
amount of $26,000,000 (incorporated by reference to Annual Report
on Form 10-K (File No. 0-20882) for the year ended December 31,
1998).                       
|10.34   |  | Amendment No. 2 to Amended and Restated Revolving Line of Credit
Agreement dated as of September 24, 1998 between Standard
Management and Fleet National Bank (incorporated by reference to
Annual Report on Form 10-K (File No. 0-20882) for the year ended
December 31, 1998).             
|10.35   |  | Amended and Restated Registration Rights Agreement dated as of
August 19, 1998 between Standard Management and Fleet National Bank
(incorporated by reference to Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1998).                                        
|10.36   |  | Amended and Restated Pledge Agreement dated as of September 23,
1998, between Standard Management and Fleet National Bank
(incorporated by reference to Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1998).                                                 
|10.37   |  | Warrant to purchase common stock of Standard Management dated
August 19, 1998 entitling Fleet National Bank to purchase 20,000
shares (incorporated by reference to Annual Report on Form 10-K
(File No. 0-20882) for the year ended December 31, 1998).                                     

45



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Number  |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.38   |  | Guaranty dated October 1, 1998 made by Standard Management in
favor of Fleet National Bank (incorporated by reference to Annual
Report on Form 10-K (File No. 0-20882) for the year ended December
31, 1998).                                                                                                                                                                                                                                
|10.39   |  | Surplus debenture dated as of December 31, 1998 by and between
Standard Management and Standard Life in the amount of $8.0 million
(incorporated by reference to Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1998).                                                                                                                                                                                        
|10.40   |  | Surplus debenture dated as of December 31, 1998 by and between
Standard Management and Standard Life in the amount of $6.0 million
(incorporated by reference to Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 1998).                                                                                                                                                                                        
|10.41*  |  | Employment Agreement between Standard Management and P.B. (Pete)
Pheffer dated and effective July 1, 1999, (incorporated by
reference to Quarterly Report on Form 10-Q (File No. 0-20882) for
the quarter ended September 30, 1999).                                                                                                                                                                                                         
|10.42   |  | Note Agreement dated October 31, 2000 by and between Standard
Management and Zurich Capital Markets, Inc. in the amount of $11.0
million. Included as an exhibit to this note agreement is an
Investment Advisory Agreement dated December 1, 2000 by and between
Standard Management and Scudder Kemper Investments, Inc.
(incorporated by reference to Annual Report in Form 10-K (File No.
0-20882) for the year ended December 31, 2000).
|10.43   |  | Letter Agreement serving as Amendment No. 3 to Amended and
Restated Line of Credit Agreement dated October 3, 2000 by and
between Standard Management and Fleet National Bank (incorporated
by reference to Quarterly Report on Form 10-Q
(File No. 0-20882) for the quarter ended March 31, 2001).                                                                                                                                          
|10.44*  |  | Employment Agreement between Standard Management and John J.
Dillon dated and effective January 1, 2002 (incorporated by reference
to Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 2001).                                                                                                                                                                                                                   
|10.45   |  | Promissory Note for $6.9 million between Standard Management and
Republic Bank dated December 28, 2001 (incorporated by reference to
Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 2001).                                                                                                                                                                                                                    
|10.46*  |  | Employment Agreement between Standard Management and Dr. Mason
Goodman dated and effective November 1, 2002.                                                                                                                                                                                                                                                                                                                                 
|10.47*  |  | Standard Management Corporation 2002 Stock Incentive Plan
(incorporated by reference to Standard Management's Registration
Statement on Form S-8 (Registration No. 333-101359)).                                                                                                                                                                                                                                                             
|10.51*  |  | Deferred Compensation Plan of Standard Management dated and effective
December 31, 2001 (incorporated by reference to
Annual Report on Form 10-K (File No.
0-20882) for the year ended December 31, 2001).                                                                                                                                                                                                                                   
|21      |  | List of Subsidiaries of Standard Management                                                                                                                                                                                                                                                                                                                                                                                                  
|23.1    |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                                                                                                                 
|23.2    |  | Consent of KPMG Audit                                                                                                                                                                                                                                                                                                                                                                                                                        
|24      |  | Powers of Attorney (Included on the signature page to this Form 10-K)                                                                                                                                                                                                                                                                                                                                                                        
|99.1    |  | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                                                
|99.2    |  | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                                                                

46



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##### Table of Contents





---

|* |  | Management contract or compensation plan or arrangement required to be filed
as an exhibit to this Report on Form 10-K pursuant to Item 15(c) of Form 10-K.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

(b)  Reports on Form 8-K

On October 2, 2002 we filed a Current Report on Form 8-K reporting the
unaudited pro forma consolidated balance sheet as of June 30, 2002, and the
unaudited pro forma consolidated statements of income for the six month period
ended June 30, 2002 and the year ended December 31, 2001, giving effect to the
sale of our Premier Life (Luxembourg) S.A. business to Winterthur Life, a
division of Credit Suisse Group.

On February 21, 2003, we filed a Current Report on Form 8-K reporting the
amendment to the quarterly report for the period ended September 30, 2002 and
to restate the financial statements for the period ended September 30, 2002
giving effect to the error in calculating the gain on sale of discontinued
operations.

47



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                    |  |                                                               
|------------------- |  | --------------------------------------------------------------
|Date: March 6, 2003 |  |                                                               
|                    |  |                                                               
|                    |  | STANDARD MANAGEMENT CORPORATION                               
|                    |  |                                                               
|                    |  | /s/ Ronald D. Hunter                                          
|                    |  |                                                               
|                    |  | Ronald D. Hunter
Director, Founder and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 6, 2003 by the following persons on
behalf of the Registrant and in the capacities indicated.

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ronald D. Hunter and Stephen M. Coons and each
of them (with full power of each of them to act alone), his attorneys-in-fact
and agents, with full power of substitution, for him and in his name, place and
stead in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K or any other instruments he deems necessary or appropriate,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them may lawfully do or cause to be done by virtue thereof.

|                                             |  |                                                                              
|-------------------------------------------- |  | -----------------------------------------------------------------------------
|/s/  Ronald D. HunterRonald D. Hunter        |  | Director, Founder and Chief Executive Officer
(Principal Executive Officer)  
|                                            
|/s/ P.B. (Pete) PhefferP.B. (Pete) Pheffer   |  | Director, President and Chief Financial Officer
(Principal Financial Officer)
|                                            
|/s/ Gerald R. HochgesangGerald R. Hochgesang |  | Senior Vice President - Finance and Treasurer
(Principal Accounting Officer) 
|                                            
|/s/ Stephen M. CoonsStephen M. Coons         |  | Director                                                                     
|                                            
|/s/ Martial R. KnieserMartial R. Knieser     |  | Director                                                                     
|                                            
|/s/ Robert A. BornsRobert A. Borns           |  | Director                                                                     
|                                            
|/s/ James H. Steane IIJames H. Steane II     |  | Director                                                                     
|                                            
|/s/ Robert J. SalyersRobert J. Salyers       |  | Director                                                                     

48



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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES



---



CERTIFICATION

I, Ronald D. Hunter, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Standard Management
Corporation;                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the Evaluation Date);
and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                                                                            |  | 
|----- |  | -------------------------------------------------------------------------- |  | 
|Date: |  | March 6, 2003                                                              |  | 
|     
|      |  |                                                                            |  | 
|     
|      |  | /s/  Ronald D. HunterRonald D. Hunter
Chairman and Chief Executive Officer |  | 





---



##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES



---



CERTIFICATION

I, Paul B. (Pete) Pheffer, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Standard Management
Corporation;                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the Evaluation Date);
and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                                                                                             |  | 
|----- |  | ------------------------------------------------------------------------------------------- |  | 
|Date: |  | March 6, 2003                                                                               |  | 
|     
|      |  |                                                                                             |  | 
|     
|      |  | /s/  Paul B. (Pete) PhefferPaul B. (Pete) Pheffer
President and Chief Financial Officer |  | 



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##### Table of Contents



ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 14(a)(1) AND (2),(c) AND (d)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LIST OF FINANCIAL STATEMENTS

and

FINANCIAL STATEMENT SCHEDULES

CERTAIN EXHIBITS

FINANCIAL STATEMENT SCHEDULES

Year Ended December 31, 2002

STANDARD MANAGEMENT CORPORATION

INDIANAPOLIS, INDIANA





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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

|                                                                                                                                                                                                                    |  |      |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                                                                                                                                    |  | Page
|Audited Consolidated Financial Statements                                                                                                                                                                           |  |      |      | 
|Report of Independent Auditors                                                                                                                                                                                      |  |      | F-2  | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                                                                                                                                        |  |      | F-4  | 
|Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000                                                                                                                              |  |      | F-5  | 
|Consolidated Statements of Shareholders Equity for the Years Ended
December 31, 2002, 2001 and 2000                                                                                                                |  |      | F-7  | 
|Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000                                                                                                                          |  |      | F-9  | 
|Notes to Consolidated Financial Statements                                                                                                                                                                          |  |      | F-10 | 
|Financial Statement Schedules                                                                                                                                                                                       |  |      |      | 
|The following consolidated financial statement schedules are included in this report and should be read in
conjunction with the Audited Consolidated Financial Statements                                           |  |      |      | 
|Schedule II  Condensed Financial Information of Registrant
(Parent Company) for the Years Ended December 31, 2002, 2001 and 2000                                                                                   |  |      | F-30 | 
|Schedule IV  Reinsurance for the Years Ended December 31, 2002, 2001 and 2000                                                                                                                                      |  |      | F-34 | 
|Schedules not listed above have been omitted because they are not applicable or
are not required, or because the required information is included in the
Audited Consolidated Financial Statements or related Notes |  |      |      | 

F-1



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##### Table of Contents



Report of Independent Auditors

Shareholders and Board of Directors
Standard Management Corporation

We have audited the accompanying consolidated balance sheets of Standard
Management Corporation and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, shareholders equity and cash
flows for each of the three years in the period ended December 31, 2002. Our
audits also included the financial statement schedules listed in the Index at
Item 15 (a). These financial statements and schedules are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits. We did not audit the
consolidated balance sheet at September 30, 2001 or the consolidated statements
of operations, shareholders equity and cash flows for each of the two years in
the period ended September 30, 2001 of Standard Management International S.A.
and subsidiaries, a wholly owned subsidiary group, which financial statements
reflect assets totaling approximately 27% of the Companys consolidated assets
at December 31, 2001 and revenues totaling approximately 11% and 6% of
consolidated revenues for each of the two years in the period ended December
31, 2001. Those financial statements, which as explained in Note 1, are
included in the Companys consolidated balance sheet at December 31, 2001 and
the Companys consolidated statements of income, shareholders equity and cash
flows for each of the two years in the period ended December 31, 2001, were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the data included for Standard Management
International S.A., is based solely on the report of other auditors.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Standard Management
Corporation and subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in 2002
the Company adopted Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets.

|                                        |  |                      
|--------------------------------------- |  | ---------------------
|                                        |  | /s/ Ernst & Young
LLP
|                                        |  |                      
|Indianapolis, Indiana
February 21, 2003 |  |                      

F-2



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##### Table of Contents



Report of Independent Auditors

Shareholders and Board of Directors
Standard Management International S.A.

We have audited the accompanying consolidated balance sheets of Standard
Management International S.A. and its subsidiaries as at September 30, 2001 and
2000 and the related consolidated statements of operations, shareholders
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended September 30, 2001. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the annual accounts. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion the financial statements referred to above present fairly,
in all material aspects, the consolidated financial position of Standard
Management International S.A. and its subsidiaries as at September 30, 2001 and
the consolidated results of their operations and their cash flows for each of
the years in the three-year period ended September 30, 2001 in conformity with
accounting principles generally accepted in the United States of America.

|                                 |  | 
|-------------------------------- |  | 
|Luxembourg City, Luxembourg      |  | 
|                                 |  | 
|February 14, 2002
/s/ KPMG Audit |  | 

F-3



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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)

|                                                                                            |                                                                                                                                        |                                                           |                                          |           |             |           |         |           |           |         | 
|------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------- | --------- | ----------- | --------- | ------- | --------- | --------- | ------- | 
|                                                                                            |                                                                                                                                        |                                                           |                                          |           | December 31
|                                                                                            |                                                                                                                                        |                                                           |                                          |           |            
|                                                                                            |                                                                                                                                        |                                                           |                                          |           | 2002        |           | 2001   
|                                                                                            |                                                                                                                                        |                                                           |                                          |           |             |           |        
|ASSETS                                                                                      |                                                                                                                                        |                                                           |                                          |           |             |           |         |          
|Investments:                                                                                |                                                                                                                                        |                                                           |                                          |           |             |           |         |          
|                                                                                            | Securities available for sale:                                                                                                         |                                                           |                                          |           |             |           |         |           |          
|                                                                                            |                                                                                                                                        | Fixed maturity securities, at fair value (amortized cost: |                                          |           |             |           |         |           |           |        
|                                                                                            |                                                                                                                                        |                                                           | $1,350,961 in 2002 and $930,824 in 2001) |           | $           | 1,379,792 |         |           | $         | 920,937 | 
|                                                                                            | Mortgage loans on real estate                                                                                                          |                                                           |                                          | 6,348     |             |           |         | 5,978     |          
|                                                                                            | Policy loans                                                                                                                           |                                                           |                                          | 12,722    |             |           |         | 12,946    |          
|                                                                                            | Real estate                                                                                                                            |                                                           |                                          | 1,252     |             |           |         | 3,056     |          
|                                                                                            | Equity-indexed call options                                                                                                            |                                                           |                                          | 3,904     |             |           |         | 3,545     |          
|                                                                                            | Other invested assets                                                                                                                  |                                                           |                                          | 1,076     |             |           |         | 783       |          
|                                                                                            | Short-term investments                                                                                                                 |                                                           |                                          | 713       |             |           |         | 5,509     |          
|                                                                                            |                                                                                                                                        |                                                           |                                          |           |             |           |         |          
|                                                                                            |                                                                                                                                        | Total investments                                         |                                          |           | 1,405,807   |           |         |           | 952,754   |        
|Cash and cash equivalents                                                                   |                                                                                                                                        |                                                           | 60,197                                   |           |             |           | 18,144  |          
|Accrued investment income                                                                   |                                                                                                                                        |                                                           | 16,255                                   |           |             |           | 14,152  |          
|Amounts due and recoverable from reinsurers                                                 |                                                                                                                                        |                                                           | 38,951                                   |           |             |           | 41,969  |          
|Deferred policy acquisition costs                                                           |                                                                                                                                        |                                                           | 153,954                                  |           |             |           | 109,844 |          
|Present value of future profits                                                             |                                                                                                                                        |                                                           | 14,949                                   |           |             |           | 22,269  |          
|Goodwill                                                                                    |                                                                                                                                        |                                                           | 6,417                                    |           |             |           | 5,146   |          
|Property and equipment (less accumulated depreciation of $3,903 in 2002
and $2,428 in 2001) |                                                                                                                                        |                                                           | 12,832                                   |           |             |           | 12,148  |          
|Other assets                                                                                |                                                                                                                                        |                                                           | 5,785                                    |           |             |           | 6,897   |          
|Assets of discontinued operations                                                           |                                                                                                                                        |                                                           |                                         |           |             |           | 430,330 |          
|                                                                                            |                                                                                                                                        |                                                           |                                          |           |             |           |         |          
|                                                                                            |                                                                                                                                        | Total assets                                              |                                          | $         | 1,715,147   |           |         | $         | 1,613,653 |        
|                                                                                            |                                                                                                                                        |                                                           |                                          |           |             |           |         |          
|LIABILITIES AND SHAREHOLDERS EQUITY                                                        |                                                                                                                                        |                                                           |                                          |           |             |           |         |          
|Liabilities:                                                                                |                                                                                                                                        |                                                           |                                          |           |             |           |         |          
|                                                                                            | Insurance policy liabilities                                                                                                           |                                                           | $                                        | 1,570,348 |             |           | $       | 1,065,763 |          
|                                                                                            | Accounts payable and accrued expenses                                                                                                  |                                                           |                                          | 5,561     |             |           |         | 5,935     |          
|                                                                                            | Obligations under capital lease                                                                                                        |                                                           |                                          | 804       |             |           |         | 1,152     |          
|                                                                                            | Mortgage payable                                                                                                                       |                                                           |                                          | 6,757     |             |           |         | 6,900     |          
|                                                                                            | Notes payable                                                                                                                          |                                                           |                                          | 13,000    |             |           |         | 19,100    |          
|                                                                                            | Current income taxes                                                                                                                   |                                                           |                                          | 3,811     |             |           |         |          |          
|                                                                                            | Deferred income taxes                                                                                                                  |                                                           |                                          | 6,432     |             |           |         | 6,392     |          
|                                                                                            | Liabilities of discontinued operations                                                                                                 |                                                           |                                          |          |             |           |         | 417,522   |          
|                                                                                            |                                                                                                                                        |                                                           |                                          |           |             |           |         |          
|                                                                                            |                                                                                                                                        | Total liabilities                                         |                                          |           | 1,606,713   |           |         |           | 1,522,764 |        
|Company-obligated trust preferred securities                                                |                                                                                                                                        |                                                           | 20,700                                   |           |             |           | 20,700  |          
|Shareholders Equity:                                                                       |                                                                                                                                        |                                                           |                                          |           |             |           |         |          
|                                                                                            | Preferred stock, no par value
Authorized 1,000,000 shares; none issued and outstanding                                                 |                                                           |                                          |          |             |           |         |          |          
|                                                                                            | Common stock and additional paid in capital, no par value
Authorized 20,000,000 shares; issued 9,369,752 in 2002 and
9,039,471 in 2001 |                                                           |                                          | 63,857    |             |           |         | 63,011    |          
|                                                                                            | Treasury stock, at cost, 1,515,078 shares in 2002 and 1,492,978
shares in 2001                                                         |                                                           |                                          | (7,671    | )           |           |         | (7,589    | )        
|                                                                                            | Accumulated other comprehensive income (loss)                                                                                          |                                                           |                                          | 11,739    |             |           |         | (6,172    | )        
|                                                                                            | Retained earnings                                                                                                                      |                                                           |                                          | 19,809    |             |           |         | 20,939    |          
|                                                                                            |                                                                                                                                        |                                                           |                                          |           |             |           |         |          
|                                                                                            |                                                                                                                                        | Total shareholders equity                                |                                          |           | 87,734      |           |         |           | 70,189    |        
|                                                                                            |                                                                                                                                        |                                                           |                                          |           |             |           |         |          
|                                                                                            |                                                                                                                                        | Total liabilities and shareholders equity                |                                          | $         | 1,715,147   |           |         | $         | 1,613,653 |        
|                                                                                            |                                                                                                                                        |                                                           |                                          |           |             |           |         |          

See accompanying notes to consolidated financial statements

F-4



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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)

|                                                                                   |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |        |        | 
|---------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------------------------ | ------- | ---------------------- | ------ | ---- | ----- | ------- | ------ | - | ----- | ------ | ------ | 
|                                                                                   |                                                                                         |                                                        |         | Year Ended December 31
|                                                                                   |                                                                                         |                                                        |         |                       
|                                                                                   |                                                                                         |                                                        |         | 2002                   |        | 2001 |       | 2000   
|                                                                                   |                                                                                         |                                                        |         |                        |        |      |       |        
|Revenues:                                                                          |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       
|                                                                                   | Premium income                                                                          |                                                        | $       | 9,173                  |        |      | $     | 9,419   |        |   | $     | 9,433  |       
|                                                                                   | Net investment income                                                                   |                                                        |         | 75,839                 |        |      |       | 58,539  |        |   |       | 50,278 |       
|                                                                                   | Call option losses                                                                      |                                                        |         | (10,089                | )      |      |       | (5,906  | )      |   |       | (7,603 | )     
|                                                                                   | Net realized investment losses                                                          |                                                        |         | (19,841                | )      |      |       | (10,351 | )      |   |       | (4,492 | )     
|                                                                                   | Policy income                                                                           |                                                        |         | 8,084                  |        |      |       | 7,721   |        |   |       | 8,204  |       
|                                                                                   | Fee and other income                                                                    |                                                        |         | 3,265                  |        |      |       | 7,348   |        |   |       | 5,980  |       
|                                                                                   |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       
|                                                                                   |                                                                                         | Total revenues from continuing operations              |         |                        | 66,431 |      |       |         | 66,770 |   |       |        | 61,800 | 
|                                                                                   |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       
|Benefits and expenses:                                                             |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       
|                                                                                   | Benefits and claims                                                                     |                                                        |         | 9,938                  |        |      |       | 12,975  |        |   |       | 13,795 |       
|                                                                                   | Interest credited to interest-sensitive annuities and other financial
products          |                                                        |         | 42,650                 |        |      |       | 30,227  |        |   |       | 21,335 |       
|                                                                                   | Amortization                                                                            |                                                        |         | 10,622                 |        |      |       | 5,127   |        |   |       | 7,375  |       
|                                                                                   | Commission expenses                                                                     |                                                        |         | 1,206                  |        |      |       | 3,871   |        |   |       | 1,918  |       
|                                                                                   | Operating expenses                                                                      |                                                        |         | 14,989                 |        |      |       | 10,669  |        |   |       | 10,685 |       
|                                                                                   | Interest expense and financing costs                                                    |                                                        |         | 4,351                  |        |      |       | 3,492   |        |   |       | 3,416  |       
|                                                                                   |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       
|                                                                                   |                                                                                         | Total benefits and expenses from continuing operations |         |                        | 83,756 |      |       |         | 66,361 |   |       |        | 58,524 | 
|                                                                                   |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       
|Income (loss) before federal income taxes (benefits) and preferred
stock dividends |                                                                                         |                                                        | (17,325 | )                      |        |      | 409   |         |        |   | 3,276 |       
|Federal income taxes (benefits)                                                    |                                                                                         |                                                        | (9,467  | )                      |        |      | 195   |         |        |   | (272  | )     
|                                                                                   |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       
|Income (loss) from continuing operations before extraordinary loss                 |                                                                                         |                                                        | (7,858  | )                      |        |      | 214   |         |        |   | 3,548 |       
|Extraordinary loss, net tax benefits of $185                                       |                                                                                         |                                                        |        |                        |        |      |      |         |        |   | (359  | )     
|Discontinued operations:                                                           |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       
|                                                                                   | Income from discontinued operations less taxes of $550, ($185) and
$1,050, respectively |                                                        |         | 1,068                  |        |      |       | 1,566   |        |   |       | 2,078  |       
|                                                                                   | Gain from the sale of discontinued operations less taxes of $4,125                      |                                                        |         | 6,872                  |        |      |       |        |        |   |       |       |       
|                                                                                   |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       
|Total income from discontinued operations                                          |                                                                                         |                                                        | 7,940   |                        |        |      | 1,566 |         |        |   | 2,078 |       
|Cumulative effect of accounting change for goodwill impairment                     |                                                                                         |                                                        | (1,212  | )                      |        |      |      |         |        |   |      |       
|                                                                                   |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       
|Net income (loss)                                                                  |                                                                                         |                                                        | (1,130  | )                      |        |      | 1,780 |         |        |   | 5,267 |       
|Preferred stock dividends                                                          |                                                                                         |                                                        |        |                        |        |      | (318  | )       |        |   | (506  | )     
|                                                                                   |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       
|Earnings (loss) available to common shareholders                                   |                                                                                         | $                                                      | (1,130  | )                      |        | $    | 1,462 |         |        | $ | 4,761 |       
|                                                                                   |                                                                                         |                                                        |         |                        |        |      |       |         |        |   |       |       

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (continued)
(Dollars in Thousands, Except Per Share Amounts)

|                                                               |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |     |      |  
|-------------------------------------------------------------- | --------------------------------------------- | ------------------------------------------------------------------ | ---- | ---------------------- | ----- | ---- | --- | ---- | ---- | - | --- | --- | ---- | -
|                                                               |                                               |                                                                    |      | Year Ended December 31
|                                                               |                                               |                                                                    |      |                       
|                                                               |                                               |                                                                    |      | 2002                   |       | 2001 |     | 2000
|                                                               |                                               |                                                                    |      |                        |       |      |     |     
|Earnings (loss) per common share  basic:                      |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|                                                               |                                               | Income (loss) from continuing operations before extraordinary loss |      | $                      | (1.03 | )    |     | $    | .03  |   |     | $   | .46  |  
|                                                               |                                               | Extraordinary loss                                                 |      |                        |      |      |     |      |     |   |     |     | (.05 | )
|                                                               |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|                                                               |                                               | Net income (loss) from continuing operations                       |      |                        | (1.03 | )    |     |      | .03  |   |     |     | .41  |  
|Discontinued operations:                                       |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|                                                               | Income from discontinued operations           |                                                                    |      | .14                    |       |      |     | .20  |      |   |     | .27 |     
|                                                               | Gain from the sale of discontinued operations |                                                                    |      | .90                    |       |      |     |     |      |   |     |    |     
|                                                               |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|Total income from discontinued operations                      |                                               |                                                                    | 1.04 |                        |       |      | .20 |      |      |   | .27 |    
|Cumulative effect of accounting change for goodwill impairment |                                               |                                                                    | (.16 | )                      |       |      |    |      |      |   |    |    
|                                                               |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|Net income (loss)                                              |                                               |                                                                    | (.15 | )                      |       |      | .23 |      |      |   | .68 |    
|                                                               |                                               | Preferred stock dividends                                          |      |                        |      |      |     |      | (.04 | ) |     |     | (.06 | )
|                                                               |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|                                                               |                                               | Earnings (loss) available to common shareholders                   |      | $                      | (.15  | )    |     | $    | .19  |   |     | $   | .62  |  
|                                                               |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|Earnings (loss) per common share  diluted:                    |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|                                                               |                                               | Income (loss) from continuing operations before extraordinary loss |      | $                      | (.99  | )    |     | $    | .03  |   |     | $   | .47  |  
|                                                               |                                               | Extraordinary loss                                                 |      |                        |      |      |     |      |     |   |     |     | (.04 | )
|                                                               |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|                                                               |                                               | Net income (loss) from continuing operations                       |      |                        | (.99  | )    |     |      | .03  |   |     |     | .43  |  
|Discontinued operations:                                       |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|                                                               | Income from discontinued operations           |                                                                    |      | .13                    |       |      |     | .20  |      |   |     | .23 |     
|                                                               | Gain from the sale of discontinued operations |                                                                    |      | .87                    |       |      |     |     |      |   |     |    |     
|                                                               |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|Total income from discontinued operations                      |                                               |                                                                    | 1.00 |                        |       |      | .20 |      |      |   | .23 |    
|Cumulative effect of accounting change for goodwill impairment |                                               |                                                                    | (.15 | )                      |       |      |    |      |      |   |    |    
|                                                               |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|Net income (loss)                                              |                                               |                                                                    | (.14 | )                      |       |      | .23 |      |      |   | .66 |    
|                                                               |                                               | Preferred stock dividends                                          |      |                        |      |      |     |      | (.04 | ) |     |     | (.05 | )
|                                                               |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    
|                                                               |                                               | Earnings (loss) available to common shareholders                   |      | $                      | (.14  | )    |     | $    | .19  |   |     | $   | .61  |  
|                                                               |                                               |                                                                    |      |                        |       |      |     |      |      |   |     |    

See accompanying notes to consolidated financial statements

F-6



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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in Thousands)

|                                                            |                             |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        |       |  |  |  | 
|----------------------------------------------------------- | --------------------------- | ------------------------------------------------------------ | -------------------------- | -------------------- | ------ | ----- | ------ | ----- |  | -------------- | ------ | ------------- |  | ----------------- | ------- | ------------- | ------ | ----------------- | ------ | ----- |  |  |  | 
|                                                            |                             |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        | Accumulated other |        |       |  | 
|                                                            |                             |                                                              |                            |                      |        |       |        |       |  | Common         |        |               |  |                   |         | comprehensive |        |                   |        |      
|                                                            |                             |                                                              |                            |                      |        | Total |        | stock |  | Treasury stock |        | income (loss) |  | Retained earnings
|                                                            |                             |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                  
|Balance January 1, 2000                                     |                             | $                                                            | 53,360                     |                      |        | $     | 62,152 |       |  | $              | (6,802 | )             |  | $                 | (16,706 | )             |        | $                 | 14,716 |      
|Comprehensive income:                                       |                             |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        |      
|                                                            | Net income                  |                                                              |                            | 5,267                |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        | 5,267 | 
|                                                            | Other comprehensive income: |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        |       | 
|                                                            |                             | Change in unrealized gain on securities,
net taxes of $3,219 |                            |                      | 6,204  |       |        |       |  |                |        |               |  |                   |         |               | 6,204  |                   |        |       |  | 
|                                                            |                             | Change in foreign currency translation                       |                            |                      | (1,506 | )     |        |       |  |                |        |               |  |                   |         |               | (1,506 | )                 |        |       |  | 
|                                                            |                             |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        |      
|                                                            |                             |                                                              | Other comprehensive income |                      |        | 4,698 |        |       |  |                |        |               |  |                   |         |               |        |                   |        |       |  |  | 
|                                                            |                             |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        |      
|                                                            |                             |                                                              |                            | Comprehensive income |        |       | 9,965  |       |  |                |        |               |  |                   |         |               |        |                   |        |       |  |  |  | 
|Issuance of common stock warrants                           |                             |                                                              | 867                        |                      |        |       | 867    |       |  |                |        |               |  |                   |         |               |        |                   |        |      
|Treasury stock acquired                                     |                             |                                                              | (787                       | )                    |        |       |        |       |  |                | (787   | )             |  |                   |         |               |        |                   |        |      
|Preferred stock dividends                                   |                             |                                                              | (506                       | )                    |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   | (506   | )    
|                                                            |                             |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        |      
|Balance at December 31, 2000                                |                             | $                                                            | 62,899                     |                      |        | $     | 63,019 |       |  | $              | (7,589 | )             |  | $                 | (12,008 | )             |        | $                 | 19,477 |      
|Comprehensive income:                                       |                             |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        |      
|                                                            | Net income                  |                                                              |                            | 1,780                |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        | 1,780 | 
|                                                            | Other comprehensive income: |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        |       | 
|                                                            |                             | Change in unrealized gain on securities,
net taxes of $2,897 |                            |                      | 5,714  |       |        |       |  |                |        |               |  |                   |         |               | 5,714  |                   |        |       |  | 
|                                                            |                             | Change in foreign currency translation                       |                            |                      | 122    |       |        |       |  |                |        |               |  |                   |         |               | 122    |                   |        |       |  | 
|                                                            |                             |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        |      
|                                                            |                             |                                                              | Other comprehensive income |                      |        | 5,836 |        |       |  |                |        |               |  |                   |         |               |        |                   |        |       |  |  | 
|                                                            |                             |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        |      
|                                                            |                             |                                                              | Comprehensive income       |                      |        | 7,616 |        |       |  |                |        |               |  |                   |         |               |        |                   |        |       |  |  | 
|Adjustment of issuance of common stock warrants and
options |                             |                                                              | (8                         | )                    |        |       | (8     | )     |  |                |        |               |  |                   |         |               |        |                   |        |      
|Preferred stock dividends                                   |                             |                                                              | (318                       | )                    |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   | (318   | )    
|                                                            |                             |                                                              |                            |                      |        |       |        |       |  |                |        |               |  |                   |         |               |        |                   |        |      
|Balance at December 31, 2001                                |                             | $                                                            | 70,189                     |                      |        | $     | 63,011 |       |  | $              | (7,589 | )             |  | $                 | (6,172  | )             |        | $                 | 20,939 |      

F-7



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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY  continued
(Dollars in Thousands)

|                                                   |                             |                                        |                                                              |                            |       |        |        |       |  |                |        |               |  |                   |        |               |       |                   |        |        |   |  |  | 
|-------------------------------------------------- | --------------------------- | -------------------------------------- | ------------------------------------------------------------ | -------------------------- | ----- | ------ | ------ | ----- |  | -------------- | ------ | ------------- |  | ----------------- | ------ | ------------- | ----- | ----------------- | ------ | ------ | - |  |  | 
|                                                   |                             |                                        |                                                              |                            |       |        |        |       |  |                |        |               |  |                   |        |               |       | Accumulated other |        |        |   | 
|                                                   |                             |                                        |                                                              |                            |       |        |        |       |  | Common         |        |               |  |                   |        | comprehensive |       |                   |        |       
|                                                   |                             |                                        |                                                              |                            |       | Total  |        | stock |  | Treasury stock |        | income (loss) |  | Retained earnings
|                                                   |                             |                                        |                                                              |                            |       |        |        |       |  |                |        |               |  |                  
|Balance at January 1, 2002                         |                             | $                                      | 70,189                                                       |                            |       | $      | 63,011 |       |  | $              | (7,589 | )             |  | $                 | (6,172 | )             |       | $                 | 20,939 |       
|Comprehensive income:                              |                             |                                        |                                                              |                            |       |        |        |       |  |                |        |               |  |                   |        |               |       |                   |        |       
|                                                   | Net loss                    |                                        |                                                              | (1,130                     | )     |        |        |       |  |                |        |               |  |                   |        |               |       |                   |        | (1,130 | )
|                                                   | Other comprehensive income: |                                        |                                                              |                            |       |        |        |       |  |                |        |               |  |                   |        |               |       |                   |        |        |  
|                                                   |                             |                                        | Change in unrealized gain on securities,
net taxes of $8,155 |                            |       | 15,665 |        |       |  |                |        |               |  |                   |        |               |       | 15,665            |        |        |   |  | 
|                                                   |                             | Change in foreign currency translation |                                                              |                            | 2,246 |        |        |       |  |                |        |               |  |                   |        |               | 2,246 |                   |        |        |   | 
|                                                   |                             |                                        |                                                              |                            |       |        |        |       |  |                |        |               |  |                   |        |               |       |                   |        |       
|                                                   |                             |                                        |                                                              | Other comprehensive income |       |        | 17,911 |       |  |                |        |               |  |                   |        |               |       |                   |        |        |   |  |  | 
|                                                   |                             |                                        |                                                              |                            |       |        |        |       |  |                |        |               |  |                   |        |               |       |                   |        |       
|                                                   |                             |                                        |                                                              | Comprehensive income       |       |        | 16,781 |       |  |                |        |               |  |                   |        |               |       |                   |        |        |   |  |  | 
|Issuance of common stock and common stock warrants |                             |                                        | 879                                                          |                            |       |        | 879    |       |  |                |        |               |  |                   |        |               |       |                   |        |       
|Exercise of common stock options                   |                             |                                        | (33                                                          | )                          |       |        | (33    | )     |  |                |        |               |  |                   |        |               |       |                   |        |       
|Purchase of treasury stock                         |                             |                                        | (82                                                          | )                          |       |        |        |       |  |                | (82    | )             |  |                   |        |               |       |                   |        |       
|                                                   |                             |                                        |                                                              |                            |       |        |        |       |  |                |        |               |  |                   |        |               |       |                   |        |       
|Balance at December 31, 2002                       |                             | $                                      | 87,734                                                       |                            |       | $      | 63,857 |       |  | $              | (7,671 | )             |  | $                 | 11,739 |               |       | $                 | 19,809 |       
|                                                   |                             |                                        |                                                              |                            |       |        |        |       |  |                |        |               |  |                   |        |               |       |                   |        |       

See accompanying notes to consolidated financial statements

F-8



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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)

|                                                                                                                                                |                                                                |                                           |          |                        |          |      |          |          |          |   |         |          |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ----------------------------------------- | -------- | ---------------------- | -------- | ---- | -------- | -------- | -------- | - | ------- | -------- | -------- | -
|                                                                                                                                                |                                                                |                                           |          | Year Ended December 31
|                                                                                                                                                |                                                                |                                           |          |                       
|                                                                                                                                                |                                                                |                                           |          | 2002                   |          | 2001 |          | 2000    
|                                                                                                                                                |                                                                |                                           |          |                        |          |      |          |         
|Operating Activities                                                                                                                            |                                                                |                                           |          |                        |          |      |          |          |          |   |         |         
|Net income (loss)                                                                                                                               |                                                                | $                                         | (1,130   | )                      |          | $    | 1,780    |          |          | $ | 5,267   |         
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:                                                        |                                                                |                                           |          |                        |          |      |          |          |          |   |         |         
|                                                                                                                                                | Amortization of deferred policy acquisition costs              |                                           |          | 10,894                 |          |      |          | 9,037    |          |   |         | 6,419    |         
|                                                                                                                                                | Deferral of policy acquisition costs                           |                                           |          | (62,619                | )        |      |          | (38,854  | )        |   |         | (35,138  | )       
|                                                                                                                                                | Deferred federal income taxes                                  |                                           |          | (8,917                 | )        |      |          | (270     | )        |   |         | 829      |         
|                                                                                                                                                | Depreciation and amortization                                  |                                           |          | 1,509                  |          |      |          | 1,004    |          |   |         | 3,671    |         
|                                                                                                                                                | Insurance policy liabilities                                   |                                           |          | 55,888                 |          |      |          | 23,972   |          |   |         | 16,337   |         
|                                                                                                                                                | Net realized investment losses                                 |                                           |          | 19,841                 |          |      |          | 11,134   |          |   |         | 4,492    |         
|                                                                                                                                                | Accrued investment income                                      |                                           |          | 1,285                  |          |      |          | (500     | )        |   |         | (1,194   | )       
|                                                                                                                                                | Cumulative effect of accounting change for goodwill impairment |                                           |          | 1,212                  |          |      |          |         |          |   |         |         |         
|                                                                                                                                                | Other                                                          |                                           |          | 443                    |          |      |          | 687      |          |   |         | 252      |         
|                                                                                                                                                |                                                                |                                           |          |                        |          |      |          |          |          |   |         |         
|                                                                                                                                                |                                                                | Net cash provided by operating activities |          |                        | 18,406   |      |          |          | 7,990    |   |         |          | 935      |  
|Investing Activities                                                                                                                            |                                                                |                                           |          |                        |          |      |          |          |          |   |         |         
|Fixed maturity securities available for sale:                                                                                                   |                                                                |                                           |          |                        |          |      |          |          |          |   |         |         
|                                                                                                                                                | Purchases                                                      |                                           |          | (1,674,454             | )        |      |          | (546,548 | )        |   |         | (290,117 | )       
|                                                                                                                                                | Sales                                                          |                                           |          | 1,218,478              |          |      |          | 328,497  |          |   |         | 180,402  |         
|                                                                                                                                                | Maturities, calls and redemptions                              |                                           |          | 9,141                  |          |      |          | 17,236   |          |   |         | 7,466    |         
|Short-term investments, net                                                                                                                     |                                                                |                                           | (5,624   | )                      |          |      | (2,574   | )        |          |   | 2,487   |         
|Purchase of HomeMed Channel, Inc.                                                                                                               |                                                                |                                           | (1,025   | )                      |          |      |         |          |          |   |        |         
|Purchase of PCA, LLC                                                                                                                            |                                                                |                                           | (190     | )                      |          |      |         |          |          |   |        |         
|Proceeds from the sale of International Operations                                                                                              |                                                                |                                           | 25,690   |                        |          |      |         |          |          |   |        |         
|Other investments, net                                                                                                                          |                                                                |                                           | (2,304   | )                      |          |      | (9,253   | )        |          |   | (6,872  | )       
|                                                                                                                                                |                                                                |                                           |          |                        |          |      |          |          |          |   |         |         
|                                                                                                                                                |                                                                | Net cash used by investing activities     |          |                        | (430,288 | )    |          |          | (212,642 | ) |         |          | (106,634 | )
|Financing Activities                                                                                                                            |                                                                |                                           |          |                        |          |      |          |          |          |   |         |         
|Borrowings                                                                                                                                      |                                                                |                                           | 200      |                        |          |      | 26,218   |          |          |   | 11,000  |         
|Repayments of notes payable and preferred stock                                                                                                 |                                                                |                                           | (6,943   | )                      |          |      | (18,930  | )        |          |   | (14,000 | )       
|Premiums received on interest-sensitive annuities and other financial products credited
to policyholder account balances, net of premiums ceded |                                                                |                                           | 598,782  |                        |          |      | 322,473  |          |          |   | 196,489 |         
|Return of policyholder account balances on interest-sensitive annuities and other
financial products                                            |                                                                |                                           | (137,989 | )                      |          |      | (108,479 | )        |          |   | (89,183 | )       
|Issuance of common stock and warrants                                                                                                           |                                                                |                                           | (33      | )                      |          |      | (8       | )        |          |   | 867     |         
|Purchase of common stock for treasury                                                                                                           |                                                                |                                           | (82      | )                      |          |      |         |          |          |   | (787    | )       
|Dividends on preferred stock                                                                                                                    |                                                                |                                           |         |                        |          |      | (318     | )        |          |   | (506    | )       
|                                                                                                                                                |                                                                |                                           |          |                        |          |      |          |          |          |   |         |         
|                                                                                                                                                |                                                                | Net cash provided by financing activities |          |                        | 453,935  |      |          |          | 220,956  |   |         |          | 103,880  |  
|                                                                                                                                                |                                                                |                                           |          |                        |          |      |          |          |          |   |         |         
|Net increase (decrease) in cash                                                                                                                 |                                                                |                                           | 42,053   |                        |          |      | 16,304   |          |          |   | (1,819  | )       
|Cash and cash equivalents at beginning of year                                                                                                  |                                                                |                                           | 18,144   |                        |          |      | 1,840    |          |          |   | 3,659   |         
|                                                                                                                                                |                                                                |                                           |          |                        |          |      |          |          |          |   |         |         
|Cash and cash equivalents at end of year                                                                                                        |                                                                | $                                         | 60,197   |                        |          | $    | 18,144   |          |          | $ | 1,840   |         
|                                                                                                                                                |                                                                |                                           |          |                        |          |      |          |          |          |   |         |         

See accompanying notes to consolidated financial statements

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002

1. Summary of Significant Accounting Policies

Organization

Standard Management Corporation (we, our, us, Standard Management
or the Company) is a holding company that a) develops, markets and/or
administers annuity and life insurance products and b) distributes pharmacy
goods and services through its health subsidiary.

On May 24, 2002, we signed an agreement to sell 100% of the shares of
Premier Life (Luxembourg) S.A. and the portfolio of Premier Life (Bermuda) Ltd.
(Premier Life) (collectively, our International Operations) to Winterthur
Life, a division of Credit Suisse Group. On August 14, 2002, we closed the
sale of our Bermuda business and received net proceeds of $6.5 million. On
September 17, 2002, we closed the sale of Premier Life (Luxembourg) S.A. and
received net proceeds of $19.2 million. A purchase price disagreement of $1.0
million exists related to the assets which remain supporting our Bermuda
shareholders equity. We are vigorously contesting the disagreement and
anticipate a favorable outcome. Accordingly, the International Operations have
been reflected as discontinued operations in the consolidated financial
statements.

Standard Managements subsidiaries at December 31, 2002 include: 1)
Standard Life Insurance Company of Indiana (Standard Life) and its
subsidiary, Dixie National Life Insurance Company (Dixie Life) 2) U.S.
Health Services Corporation (U.S. Health Services) and its subsidiaries,
HomeMed Channel, Inc. (HomeMed) and PCA, LLC (PCA) and 3) Savers Marketing
Corporation (Savers Marketing).

Basis of Presentation

Our accompanying consolidated financial statements of Standard Management
have been prepared in conformity with generally accepted accounting principles
(GAAP) in the United States and include our accounts since acquisition or
organization. All significant intercompany balances and transactions have been
eliminated.

Effective September 17, 2002 we concluded the sale of our International
Operations (discontinued operations). The fiscal year end for Standard
Management International is September 30. To facilitate reporting on the
consolidated level, the fiscal year end for Standard Management International
was not changed and the consolidated balance sheets and statements of
operations for Standard Management International at September 30, 2001 and 2000
and for each of the two years in the period ended September 30, 2001, are
included in our consolidated balance sheets at December 31, 2001 and for each
of the two years in the period ended December 31, 2001 as discontinued
operations.

Use of Estimates

The nature of our insurance businesses requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could
impact the amounts disclosed in this report.

Investments

We classify our fixed maturity and equity securities as available for sale
and, accordingly, these securities are carried at fair value. Fixed maturity
securities include bonds and redeemable preferred stocks. Changes in fair
values of securities available for sale, after adjustment for deferred policy
acquisition costs, present value of future profits and deferred income taxes,
are reported as unrealized gains or losses directly in shareholders equity
and, accordingly, have no effect on net income. The deferred policy acquisition
costs and present value of future profits adjustments to the unrealized gains
or losses represent valuation adjustments or reinstatements of these assets
that would have been required as a charge or credit to operations had such
unrealized amounts been realized.

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of Significant Accounting Policies (continued)

The cost of our fixed maturity securities is adjusted for amortization of
premiums and discounts. The amortization is provided on a constant effective
yield method over the life of the securities and is included in net investment
income.

Mortgage-backed and other collateralized securities, classified as fixed
maturity securities in the consolidated balance sheets, are comprised
principally of obligations backed by an agency of the United States government
or by the full faith and credit of the U.S. government. The income from these
securities is recognized using a constant effective yield based on anticipated
prepayments and the estimated economic life of the securities. When actual
prepayments differ significantly from anticipated prepayments, the income
recognized is adjusted currently to match that which would have been recorded
had the effective yield been applied since the acquisition of the security.
This adjustment is included in net investment income.

Mortgage loans on real estate and policy loans are carried at unpaid
principal balances and are collateralized. Real estate investments are carried
at cost, less accumulated depreciation. Short-term investments are carried at
amortized cost, which approximates fair value.

Equity-indexed call options are derivative instruments linked to the major
stock indices (Standard & Poors 500 Index (S&P 500 Index) and Dow Jones
Industrial Average (DJIA)) which are used to hedge the equity benefits of our
equity-indexed annuity products. We purchase call options whose payoff
characteristics mirror the equity benefits of our products. These securities
are carried at fair value and the change in fair value is included in
investment income.

Net Realized Investment Gains and Losses

We periodically evaluate whether the declines in fair value of our
investments are other-than-temporary. Our evaluation consists of a review of
qualitative and quantitative factors. For investments with publicly quoted
market prices, we generally consider a decline to be an other-than-temporary
impairment if the quoted market price is less than its accounting basis for
three quarters, absent evidence to the contrary. We also consider additional
factors to determine whether the declines in fair value are
other-than-temporary, such as downgrades of the security by a rating agency,
deterioration in the financial condition of the issuer, and other publicly
available issuer-specific news or general market conditions. For investments
in companies with no quoted market price, we consider similar qualitative and
quantitative factors and also take into account the cost of the investment, the
type of investment, subsequent purchases of the same or similar investments,
the current financial position and operating results of the company invested
in, and such other factors as may be relevant. Declines in fair values of
securities deemed to be other-than-temporary are recognized as a reduction of
net income.

Determining what constitutes an other-than-temporary decline involves
significant judgment. Declines in fair value below cost not considered
other-than-temporary in the current period could be considered
other-than-temporary in a future period and reduce earnings to the extent of
the write-down.

Future Policy Benefits

Liabilities for future policy benefits for deferred annuities and
universal life policies are equal to full account value that accrues to the
policyholder (cumulative premiums less certain charges, plus interest
credited). The average accrual rate was 4.45% in 2002.

Insurance policy liabilities for equity-indexed annuity products are
computed in accordance with Statement of Financial Accounting Standards
(SFAS) No. 133 (SFAS No. 133) Accounting for Derivative and Hedging
Activities, and consist of a book value liability for benefits guaranteed in
the contract, combined with a market value liability for equity-linked benefits
of the contract.

Future policy benefits for traditional life insurance contracts are
computed using the net level premium method on the basis of assumed investment
yields, mortality and withdrawals which were appropriate at the time the
policies were issued. Assumed investment yields are based on interest rates
ranging from 6.2% to 7.5%. Mortality is based upon various actuarial tables,
principally

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of Significant Accounting Policies (continued)

the 1965-1970 or the 1975-1980 Select and Ultimate Table. Withdrawals are based
upon our experience and vary by issue age, type of coverage, and duration.

Our immediate annuities generally do not incorporate significant insurance
risk and are therefore classified as investment contracts rather than insurance
contracts. Consistent with similar types of investment contracts, immediate
annuity liabilities are computed using the constant yield method.

Recognition of Insurance Policy Revenue and Related Benefits and Expenses

Revenue for immediate annuities consists of investment income earned.
Expenses relating to immediate annuities include interest credited to
policyholder liabilities and administrative expenses.

Revenue for deferred and equity-indexed annuity contracts consists of
policy charges for surrenders and investment income earned. Premiums received
for these annuity contracts are reflected as premium deposits and are not
recorded as revenues. Expenses related to these annuities include interest
credited to policyholder account balances and administrative expenses.

Revenue for universal life insurance policies consists of policy charges
for the cost of insurance, policy administration charges, surrender charges and
investment income earned. Expenses related to universal life policies include
interest credited to policyholder account balances, administrative expenses and
death benefits incurred in excess of policyholder account balances.

Traditional life insurance premiums are recognized as premium revenue over
the premium paying period of the policies. Benefits are charged to expense in
the period when claims are incurred and are associated with related premiums
through changes in reserves for future policy benefits, which results in the
recognition of profit over the premium paying period of the policies.

Reinsurance

Premiums, annuity policy charges, benefits and claims, interest credited
and amortization expense are reported net of reinsurance ceded and are
accounted for on a basis consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts.

Foreign Currency Translation

Our foreign subsidiaries balance sheets and statements of operations were
translated at the year-end exchange rates and average exchange rates for the
year, respectively. The resulting unrealized gain or loss adjustment from the
translation to U.S. dollars is recorded in the foreign currency translation
adjustment as a separate component of accumulated other comprehensive income.
Foreign exchange gains or losses relating to policyholders funds in separate
accounts are allocated to the relevant separate account. We did not have any
foreign currency translation amount at December 31, 2002 as a result of the
sale of our International Operations.

Income Taxes

Income tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period in which the change
is enacted.

We file a consolidated return with our noninsurance subsidiaries for
federal income tax purposes, and beginning January 1, 2001 with our insurance
subsidiaries, Standard Life and Dixie Life.

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of Significant Accounting Policies (continued)

Deferred Policy Acquisition Costs

Costs relating to the production of new business (primarily commissions
and certain costs of marketing, policy issuance and underwriting) are deferred
and included in the deferred policy acquisition cost asset to the extent that
such costs are recoverable from future related policy revenues. For
interest-sensitive annuities and other financial products, deferred policy
acquisition costs, with interest, are amortized over the lives of the policies
and products in a constant relationship to the present value of estimated
future gross profits, discounted using the interest rate credited to the
policy. Traditional life insurance deferred policy acquisition costs are being
amortized over the premium-paying period of the related policies using
assumptions consistent with those used in computing policy benefit reserves.

We review the recoverability of the carrying value of the deferred policy
acquisition costs each year. For interest-sensitive annuities and other
financial products, we consider estimated future gross profits in determining
whether the carrying value is appropriate; for other insurance products, we
consider estimated future premiums. In all cases, we consider expected
mortality, interest earned and crediting rates, persistency and expenses.
Amortization is adjusted retrospectively for interest-sensitive annuities and
other financial products when estimates of future gross profits to be realized
are revised.

Immediate annuity deferred policy acquisition cost amortization is
computed in conjunction with the liability for future benefits using the
constant yield method.

Present Value of Future Profits

Present value of future profits are recorded in connection with
acquisitions of insurance companies or a block of policies. The initial value
is based on the actuarially determined present value of the projected future
gross profits from the in force business acquired. In selecting the interest
rate to calculate the discounted present value of the projected future gross
profits, we use the risk rate of return believed to best reflect the
characteristics of the purchased policies, taking into account the relative
risks of such policies, the cost of funds to acquire the business and other
factors. The value of in force insurance purchased is amortized on a constant
yield basis over its estimated life from the date of acquisition in proportion
to the emergence of profits or the expected premium pattern over a period of
approximately 20 years.

For acquisitions we made on or before November 1992, we amortize the asset
with interest at the same discount rate used to determine the present value of
future profits at the date of purchase. For acquisitions after November 1992,
we amortize the asset using the interest rate credited to the underlying
policies.

Goodwill

On June 29, 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No.
142 addresses accounting and reporting of acquired goodwill and other
intangible assets. We completed our impairment testing under the requirements
of SFAS No. 142 during the fourth quarter of 2002 and the results were applied
retroactively to January 1, 2002. The initial step of our impairment test was
to identify potential goodwill impairment by comparing the fair value of our
reporting units to their carrying values including the applicable goodwill.
These fair values were determined by calculating the discounted free cash flow
expected to be generated by each reporting unit taking into account what we
consider to be the appropriate industry and market rate assumptions. If the
carrying value exceeded the fair value, then a second step was performed, which
compared the implied fair value of the applicable reporting units goodwill
with the carrying amount of that goodwill, to measure the amount of goodwill
impairment, if any. As a result of our initial transitional impairment test, we
recorded an impairment charge of approximately $1.2 million retroactive to the
first quarter of 2002, which is presented as a cumulative effect of a change in
accounting principle in our consolidated financial statements.

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of Significant Accounting Policies (continued)

In addition to performing the required transitional impairment test on our
goodwill, SFAS No. 142 required us to reassess the expected useful lives of
existing intangible assets for which the useful life is determinable. We
incurred no impairment charges as a result of SFAS No. 142 for intangibles with
determinable useful lives, which are subject to amortization. In future
periods, any charges related to goodwill impairment will be recorded in
operating income.

For the twelve months ended December 31, 2001, on a SFAS No. 142
comparable basis, our net income, basic net income per share and diluted net
income per share would have been $2.0 million, $.26 and $.26, which includes
the elimination of amortization of $.2 million or $.03 per share.

For the twelve months ended December 31, 2000, on a SFAS No. 142
comparable basis, our net income, basic net income per share and diluted net
income per share would have been $5.5 million, $.71 and $.69, which includes
the elimination of amortization of $.3 million or $.03 per share.

All goodwill is held in the domestic operations reportable segment. The
activity related to goodwill is summarized as follows for December 31 (in
thousands):

|                                         |  |      |        |  
|---------------------------------------- |  | ---- | ------ | -
|                                         |  | 2002
|                                         |  |     
|Balance, beginning of year               |  | $    | 5,146  |  
|Goodwill acquired (U.S. Health Services) |  |      | 2,483  |  
|Goodwill write-off (Dixie Life)          |  |      | (1,212 | )
|                                         |  |      |        |  
|Balance, end of year                     |  | $    | 6,417  |  
|                                         |  |      |        |  

Stock Options

We recognize compensation expense for our stock option plans using the
intrinsic value method of accounting. Under the terms of the intrinsic value
method, compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date, or other measurement date, over the amount an
employee must pay to acquire the stock. Under our stock option plans, no
expense is recognized since the exercise price equals or exceeds the market
price at the measurement date.

Reclassifications

Certain amounts in the 2001 and 2000 consolidated financial statements and
notes have been reclassified to conform with the 2002 presentation. These
reclassifications had no effect on previously reported shareholders equity or
net income in the periods presented.

Professional Accounting Standard Proposal Under Consideration  Exposure Draft

In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 requires
companies to record derivatives on the new balance sheet as assets
and/or liabilities measured at fair value. We adopted SFAS No. 133 on January 1,
2001. The adoption of SFAS No. 133 had an immaterial impact to net income.

Currently, there are ongoing discussions surrounding the implementation
and interpretation of SFAS No. 133 by FASBs Derivatives
Implementation Group. The effective date of the implementation guidance is the first day of the
first fiscal quarter beginning after June 15, 2003. If an entity had not
bifurcated an embedded derivative but is required to do so under the revised
guidance, the entity should account for the effects of initially complying with
the revised implementation guidance prospectively for all existing financial
instruments, except for the existing contracts that qualify for the
grandfathering provisions of paragraph 50, which exempts certain hybrid
instruments from the embedded derivative provisions of SFAS No. 133 on an
all-or-none basis. The effects of initially complying with the revised
implementation guidance as of the effective date should be reported as a
cumulative-effect-type adjustment of net income. At this time, management is
unable to estimate the effects on the financial statements of the tentative
conclusions or any future decisions of the FASB.

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Investments

The amortized cost, gross unrealized gains and losses and estimated fair
value of securities available for sale are as follows (in thousands):

|                               |                            |                                                                                        |                                 |   |                   |           |            |   |            |        |       |   |        |        |  |   |         |           | 
|------------------------------ | -------------------------- | -------------------------------------------------------------------------------------- | ------------------------------- | - | ----------------- | --------- | ---------- | - | ---------- | ------ | ----- | - | ------ | ------ |  | - | ------- | --------- | 
|                               |                            |                                                                                        |                                 |   | December 31, 2002
|                               |                            |                                                                                        |                                 |   |                  
|                               |                            |                                                                                        |                                 |   |                   |           |            |   | Gross      |        | Gross |   |        |        | 
|                               |                            |                                                                                        |                                 |   | Amortized         |           | Unrealized |   | Unrealized |        | Fair 
|                               |                            |                                                                                        |                                 |   | Cost              |           | Gains      |   | Losses     |        | Value
|                               |                            |                                                                                        |                                 |   |                   |           |            |   |            |        |      
|Securities available for sale: |                            |                                                                                        |                                 |   |                   |           |            |   |            |        |       |   |        |        |  |  
|                               | Fixed maturity securities: |                                                                                        |                                 |   |                   |           |            |   |            |        |       |   |        |        |  |   |        
|                               |                            | United States Treasury securities and
obligations of United States
government agencies |                                 | $ | 5,365             |           |            | $ | 440        |        |       | $ |       |        |  | $ | 5,805   |          
|                               |                            | Foreign government securities                                                          |                                 |   | 1,368             |           |            |   |           |        |       |   | 3      |        |  |   | 1,365   |          
|                               |                            | Utilities                                                                              |                                 |   | 54,016            |           |            |   | 1,358      |        |       |   | 2,504  |        |  |   | 52,870  |          
|                               |                            | Corporate bonds                                                                        |                                 |   | 654,630           |           |            |   | 27,351     |        |       |   | 16,261 |        |  |   | 665,720 |          
|                               |                            | Mortgage-backed securities                                                             |                                 |   | 632,582           |           |            |   | 19,451     |        |       |   | 1,001  |        |  |   | 651,032 |          
|                               |                            | Redeemable preferred stock                                                             |                                 |   | 3,000             |           |            |   |           |        |       |   |       |        |  |   | 3,000   |          
|                               |                            |                                                                                        |                                 |   |                   |           |            |   |            |        |       |   |        |        |  |  
|                               |                            |                                                                                        | Total fixed maturity securities |   |                   | 1,350,961 |            |   |            | 48,600 |       |   |        | 19,769 |  |   |         | 1,379,792 | 
|                               |                            |                                                                                        |                                 |   |                   |           |            |   |            |        |       |   |        |        |  |  

|                               |                            |                                                                                        |                                 |   |                   |         |            |   |            |        |       |   |        |        |  |   |         |         | 
|------------------------------ | -------------------------- | -------------------------------------------------------------------------------------- | ------------------------------- | - | ----------------- | ------- | ---------- | - | ---------- | ------ | ----- | - | ------ | ------ |  | - | ------- | ------- | 
|                               |                            |                                                                                        |                                 |   | December 31, 2001
|                               |                            |                                                                                        |                                 |   |                  
|                               |                            |                                                                                        |                                 |   |                   |         |            |   | Gross      |        | Gross |   |        |        | 
|                               |                            |                                                                                        |                                 |   | Amortized         |         | Unrealized |   | Unrealized |        | Fair 
|                               |                            |                                                                                        |                                 |   | Cost              |         | Gains      |   | Losses     |        | Value
|                               |                            |                                                                                        |                                 |   |                   |         |            |   |            |        |      
|Securities available for sale: |                            |                                                                                        |                                 |   |                   |         |            |   |            |        |       |   |        |        |  |  
|                               | Fixed maturity securities: |                                                                                        |                                 |   |                   |         |            |   |            |        |       |   |        |        |  |   |        
|                               |                            | United States Treasury securities and
obligations of United States
government agencies |                                 | $ | 5,707             |         |            | $ | 267        |        |       | $ | 7      |        |  | $ | 5,967   |        
|                               |                            | Obligations of states and political
subdivisions                                       |                                 |   | 1,972             |         |            |   | 144        |        |       |   |       |        |  |   | 2,116   |        
|                               |                            | Foreign government securities                                                          |                                 |   | 249               |         |            |   | 106        |        |       |   | 34     |        |  |   | 321     |        
|                               |                            | Utilities                                                                              |                                 |   | 26,040            |         |            |   | 153        |        |       |   | 1,036  |        |  |   | 25,157  |        
|                               |                            | Corporate bonds                                                                        |                                 |   | 574,104           |         |            |   | 9,515      |        |       |   | 19,812 |        |  |   | 563,807 |        
|                               |                            | Mortgage-backed securities                                                             |                                 |   | 319,752           |         |            |   | 4,223      |        |       |   | 3,406  |        |  |   | 320,569 |        
|                               |                            | Redeemable preferred stock                                                             |                                 |   | 3,000             |         |            |   |           |        |       |   |       |        |  |   | 3,000   |        
|                               |                            |                                                                                        |                                 |   |                   |         |            |   |            |        |       |   |        |        |  |  
|                               |                            |                                                                                        | Total fixed maturity securities |   |                   | 930,824 |            |   |            | 14,408 |       |   |        | 24,295 |  |   |         | 920,937 | 
|                               |                            |                                                                                        |                                 |   |                   |         |            |   |            |        |       |   |        |        |  |  

The estimated fair values for fixed maturity securities are based on
quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services, or by discounting expected future cash flows
using a current market rate applicable to the coupon rate, credit rating, and
maturity of the investments.

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Investments (continued)

The amortized cost and estimated fair value of fixed maturity securities
at December 31, 2002 by contractual maturity are shown below (in thousands):

|                                       |                                 |   |           |           |       |   |         |           | 
|-------------------------------------- | ------------------------------- | - | --------- | --------- | ----- | - | ------- | --------- | 
|                                       |                                 |   | Amortized |           | Fair 
|                                       |                                 |   | Cost      |           | Value
|                                       |                                 |   |           |           |      
|Due in one year                        |                                 | $ | 5,279     |           |       | $ | 5,258   |          
|Due after one year through five years  |                                 |   | 110,720   |           |       |   | 115,966 |          
|Due after five years through ten years |                                 |   | 439,260   |           |       |   | 448,556 |          
|Due after ten years                    |                                 |   | 160,120   |           |       |   | 155,980 |          
|                                       |                                 |   |           |           |       |   |         |          
|                                       | Subtotal                        |   |           | 715,379   |       |   |         | 725,760   | 
|Redeemable preferred stock             |                                 |   | 3,000     |           |       |   | 3,000   |          
|Mortgage-backed securities             |                                 |   | 632,582   |           |       |   | 651,032 |          
|                                       |                                 |   |           |           |       |   |         |          
|                                       | Total fixed maturity securities |   | $         | 1,350,961 |       |   | $       | 1,379,792 | 
|                                       |                                 |   |           |           |       |   |         |          

Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties and because most mortgage-backed securities provide for
periodic payments throughout their lives.

Net investment income was attributable to the following for the year ended
December 31 (in thousands):

|                                 |                         |                       |        |        |        |      |        |        |        |   |        |        |        | 
|-------------------------------- | ----------------------- | --------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                 |                         |                       |        | 2002   |        | 2001 |        | 2000  
|                                 |                         |                       |        |        |        |      |        |       
|Fixed maturity securities        |                         | $                     | 74,994 |        |        | $    | 57,215 |        |        | $ | 48,126 |       
|Mortgage loans on real estate    |                         |                       | 743    |        |        |      | 673    |        |        |   | 930    |       
|Policy loans                     |                         |                       | 814    |        |        |      | 877    |        |        |   | 924    |       
|Real estate                      |                         |                       | 27     |        |        |      | 30     |        |        |   | 30     |       
|Short-term investments and other |                         |                       | 398    |        |        |      | 964    |        |        |   | 847    |       
|                                 |                         |                       |        |        |        |      |        |        |        |   |        |       
|                                 | Gross investment income |                       |        | 76,976 |        |      |        | 59,759 |        |   |        | 50,857 |       
|Less: investment expenses        |                         |                       | 1,137  |        |        |      | 1,220  |        |        |   | 579    |       
|                                 |                         |                       |        |        |        |      |        |        |        |   |        |       
|                                 |                         | Net investment income |        | $      | 75,839 |      |        | $      | 58,539 |   |        | $      | 50,278 | 
|                                 |                         |                       |        |        |        |      |        |        |        |   |        |       

Net realized investment gains (losses) were attributable to the following
for the year ended December 31 (in thousands):

|                                              |                                            |                                |   |         |         |      |   |        |         |   |   |        |        |  
|--------------------------------------------- | ------------------------------------------ | ------------------------------ | - | ------- | ------- | ---- | - | ------ | ------- | - | - | ------ | ------ | -
|                                              |                                            |                                |   | 2002    |         | 2001 |   | 2000  
|                                              |                                            |                                |   |         |         |      |   |       
|Fixed maturity securities available for sale: |                                            |                                |   |         |         |      |   |        |         |   |   |       
|                                              | Gross realized gains                       |                                | $ | 20,467  |         |      | $ | 4,363  |         |   | $ | 1,545  |       
|                                              | Gross realized losses                      |                                |   | (19,276 | )       |      |   | (9,175 | )       |   |   | (1,854 | )     
|                                              | Other-than-temporary decline in fair value |                                |   | (20,027 | )       |      |   | (4,229 | )       |   |   | (3,048 | )     
|                                              |                                            |                                |   |         |         |      |   |        |         |   |   |       
|                                              |                                            | Net                            |   |         | (18,836 | )    |   |        | (9,041  | ) |   |        | (3,357 | )
|                                              | Other losses                               |                                |   | (1,005  | )       |      |   | (1,310 | )       |   |   | (1,135 | )     
|                                              |                                            |                                |   |         |         |      |   |        |         |   |   |       
|                                              |                                            | Net realized investment losses |   | $       | (19,841 | )    |   | $      | (10,351 | ) |   | $      | (4,492 | )
|                                              |                                            |                                |   |         |         |      |   |        |         |   |   |       

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Investments (continued)

Life insurance companies are required to maintain certain amounts of
assets with state or other regulatory authorities. At December 31, 2002, fixed
maturity securities of $10.0 million and cash and short-term investments of $.5
million were held on deposit by various state regulatory authorities in
compliance with statutory regulations.

Comprehensive income excludes reclassification adjustments for net
realized investment gains (losses) after income taxes (benefits) of ($13.1)
million, ($6.8) million and ($3.0) million in 2002, 2001 and 2000,
respectively. The income tax rate used for comprehensive income is 34%.

3. Deferred Policy Acquisition Costs and Present Value of Future Profits

The activity related to deferred policy acquisition costs is summarized as
follows for the year ended December 31 (in thousands):

|                           |                                                                                    |   |         |        |      |   |         |        |   |   |        |        |  
|-------------------------- | ---------------------------------------------------------------------------------- | - | ------- | ------ | ---- | - | ------- | ------ | - | - | ------ | ------ | -
|                           |                                                                                    |   | 2002    |        | 2001 |   | 2000   
|                           |                                                                                    |   |         |        |      |   |        
|Balance, beginning of year |                                                                                    | $ | 109,844 |        |      | $ | 85,195  |        |   | $ | 67,811 |       
|                           | Additions                                                                          |   |         | 62,618 |      |   |         | 30,819 |   |   |        | 26,417 |  
|                           | Amortization                                                                       |   |         | (9,097 | )    |   |         | (2,786 | ) |   |        | (4,358 | )
|                           | Adjustment relating to net unrealized (gain) loss on
securities available for sale |   |         | (9,411 | )    |   |         | (3,384 | ) |   |        | (4,675 | )
|                           |                                                                                    |   |         |        |      |   |         |        |   |   |        |       
|Balance, end of year       |                                                                                    | $ | 153,954 |        |      | $ | 109,844 |        |   | $ | 85,195 |       
|                           |                                                                                    |   |         |        |      |   |         |        |   |   |        |       

The activity related to present value of future profits is summarized as
follows for the year ended December 31 (in thousands):

|                           |                                                                                     |   |        |        |      |   |        |        |   |   |        |        |  
|-------------------------- | ----------------------------------------------------------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                           |                                                                                     |   | 2002   |        | 2001 |   | 2000  
|                           |                                                                                     |   |        |        |      |   |       
|Balance, beginning of year |                                                                                     | $ | 22,269 |        |      | $ | 26,343 |        |   | $ | 30,688 |       
|                           | Interest accreted on unamortized balance                                            |   |        | 2,902  |      |   |        | 3,169  |   |   |        | 3,472  |  
|                           | Amortization                                                                        |   |        | (4,700 | )    |   |        | (5,263 | ) |   |        | (6,226 | )
|                           | Adjustments relating to net unrealized (gain) loss on
securities available for sale |   |        | (5,522 | )    |   |        | (1,980 | ) |   |        | (1,591 | )
|                           |                                                                                     |   |        |        |      |   |        |        |   |   |        |       
|Balance, end of year       |                                                                                     | $ | 14,949 |        |      | $ | 22,269 |        |   | $ | 26,343 |       
|                           |                                                                                     |   |        |        |      |   |        |        |   |   |        |       

The percentages of future expected net amortization of the beginning
balance of the present value of future profits, before the effect of net
unrealized gains and losses, are expected to be between 10% and 15% in each of
the years 2003 through 2007. Future net amortization is based on the present
value of future profits at December 31, 2002 and current assumptions as to
future events on all policies in force.

The discount rate used to calculate the present value of future profits
reflected in our consolidated balance sheets at December 31, 2002, ranged from
8% to 18%.

F-17



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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Mortgage Payable, Notes Payable and Trust Preferred Securities

Mortgage Payable, Notes Payable and Trust Preferred Securities were as
follows at December 31 (in thousands):

|                           |                                              |  |               |      |      |   |        |       |  |   |        |       | 
|-------------------------- | -------------------------------------------- |  | ------------- | ---- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                           |                                              |  | Interest Rate |      | 2002 |   | 2001  
|                           |                                              |  |               |      |      |   |       
|Mortgage payable           |                                              |  | 7.375         | %    |      | $ | 6,757  |       |  | $ | 6,900  |      
|                           |                                              |  |               |      |      |   |        |       |  |   |        |      
|Notes payable:             |                                              |  |               |      |      |   |        |       |  |   |        |      
|                           | Promissory note                              |  |               | 6.00 | %    |   | $      | 500   |  |   | $      |      | 
|                           | Borrowings under revolving credit agreements |  |               | 4.91 | %(1) |   |        | 1,500 |  |   |        | 8,100 | 
|Senior subordinated note   |                                              |  | 10.00         | %    |      |   | 11,000 |       |  |   | 11,000 |      
|                           |                                              |  |               |      |      |   |        |       |  |   |        |      
|                           |                                              |  |               |      |      | $ | 13,000 |       |  | $ | 19,100 |      
|                           |                                              |  |               |      |      |   |        |       |  |   |        |      
|Trust preferred securities |                                              |  | 10.25         | %    |      | $ | 20,700 |       |  | $ | 20,700 |      
|                           |                                              |  |               |      |      |   |        |       |  |   |        |      



|(1) |  | Current weighted average rate at December 31, 2002.
|--- |  | ---------------------------------------------------

Mortgage Payable

On December 28, 2001 we signed a promissory note due December 31, 2011
in the principal amount of $6.9 million. The note bears interest at 7.375%
per annum and is payable in equal monthly installments of $56 thousand. The
note may be prepaid in whole or in part at our option commencing on or
before January 1, 2005 at a redemption price equal to 105% of the principal
amount (plus accrued interest) and declining to 101% of the principal amount
(plus accrued interest) if prepayment is made after January 1, 2008. The
note and all amounts due are secured by a mortgage that conveys a first
mortgage security interest in certain real and personal property we own.

Promissory Note

On December 13, 2002, we signed a promissory note due December 13, 2007
in the principal amount of $.5 million related to the acquisition of
Prescriptions by Mail, Inc. which was merged into HomeMed. The note bears
interest of 6.0% per annum and requires annual interest payments of $30
thousand in 2003 and 2004, and annual principal payments of $.2 million per
year beginning in 2005 and concluding in 2007.

Borrowings Under Revolving Credit Agreements

We have $1.5 million of outstanding borrowings at December 31, 2002
pursuant to the Amended Credit Agreement of $3.75 million in the form of a
revolving loan arrangement and have agreed to pay a non-use fee of .50% per
annum on the unused portion of the commitment. Borrowings under the Amended
Credit Agreement may be used for contributions to surplus of insurance
subsidiaries, acquisition financing and repurchases of Common Stock. The
debt is secured by a Pledge Agreement of all of the issued and outstanding
shares of Common Stock of Standard Life and Standard Marketing. Interest on
the borrowings under the Amended Credit Agreement is determined, at our
option, to be: (1) a fluctuating rate of interest to the corporate base rate
announced by the bank periodically, plus 1% per annum, or (2) a rate at
London Inter-Bank Offered Rate (LIBOR) plus 3.25%. The remaining
principal payment of $1.5 million is due in September 2003. Indebtedness
incurred under the Amended Credit Agreement is subject to certain
restrictions and covenants including, among other things, certain minimum
financial ratios, minimum consolidated equity requirements, positive net
income, minimum statutory surplus requirements for our insurance
subsidiaries and certain limitations on acquisitions, additional
indebtedness, investments, mergers, consolidations and sales of assets.

F-18



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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. Mortgage Payable, Notes Payable and Trust Preferred Securities
(continued)

Senior Subordinated Note

On October 31, 2000, we issued a Senior Subordinated Note due October
31, 2007 in the principal amount of $11 million. The note bears interest
equal to 1) a fixed rate of 10% per annum; or 2) six month LIBOR plus 150
basis points; whichever is higher. Interest payments are payable
semi-annually on April 30 and October 31 of each year. The note may be
prepaid in whole or in part at our option commencing on November 1, 2001 at
a redemption price equal to
105% of the principal amount (plus accrued interest) and declining to l00%
of the principal amount (plus accrued
interest) on November 1, 2005. The note may be prepaid beginning November
1, 2001 at a redemption price equal to l00% of the principal amount (plus
accrued interest) under certain limited circumstances. The note is subject
to certain restrictions and covenants substantially similar to those in the
Amended Credit Agreement. The holder also received a warrant to purchase
220,000 shares of our common stock at a purchase price of $4.00 per share
for a period of seven years.

The proceeds of the Senior Subordinated Note were used to repay the
Senior Subordinated Convertible Notes of $10 million at a redemption price
of 105% of the principal balance plus accrued interest. The extraordinary
loss of $.4 million, net of tax, in 2000 reflects the early extinguishment
of the Senior Subordinated Convertible Notes. These notes were convertible
at any time at the option of the note holders into our common stock at the
rate of $5.747 per share or a total of 1,740,038 shares.

Trust Preferred Securities

On August 9, 2001, SMAN Capital Trust I (the Trust), a wholly-owned
subsidiary of Standard Management, completed a public offering of $20.7
million of its 10.25% preferred securities, which mature on August 9, 2031,
at $10 per preferred security. Distributions are classified as interest
expense. The Trust used the proceeds of this offering to purchase Standard
Managements 10.25% junior subordinated debentures. Net proceeds from the
sale of the debentures of approximately $19.3 million were used to redeem
our Series A preferred stock of $6.5 million and repay $7.3 million of our
notes payable. The remaining proceeds were used for general corporate
purposes.

The terms of the preferred securities parallel the terms of the
debentures which are the sole assets of the Trust. The preferred securities
may be redeemed at any time on or after August 9, 2006 at a redemption price
of $10 plus accumulated and unpaid distributions. If the Trust redeems the
preferred securities or is liquidated and the debentures are not redeemed,
debentures will be distributed to the holders of the preferred securities
rather than cash. Standard Management guarantees the payments on these
securities to the extent that the Trust has available funds.

The Trusts preferred securities are traded on the NASDAQ National
Market under the symbol SMANP.

Interest Paid

Cash paid for interest was $4.0 million, $3.3 million and $3.6 million
in 2002, 2001 and 2000, respectively.

F-19



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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. Income Taxes

The components of the federal income tax expense, applicable to pre-tax
income (loss) before extraordinary loss, were as follows for the year ended
December 31 (in thousands):

|                         |  |      |         |      |  |      |      |   |  |   |      |  
|------------------------ |  | ---- | ------- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                         |  | 2002 |         | 2001 |  | 2000
|                         |  |      |         |      |  |     
|Current taxes            |  | $    | 3,550   |      |  | $    | 892  |   |  | $ | --   |  
|Deferred taxes (benefit) |  |      | (13,017 | )    |  |      | (697 | ) |  |   | (272 | )
|                         |  |      |         |      |  |      |      |   |  |   |      |  
|                         |  | $    | (9,467  | )    |  | $    | 195  |   |  | $ | (272 | )
|                         |  |      |         |      |  |      |      |   |  |   |      |  

The effective tax rate on pre-tax income (loss) differs from statutory
corporate federal income tax rate as follows for the year ended December 31 (in
thousands):

|                                                                        |                                      |   |        |        |      |   |      |     |  |   |        |      |  
|----------------------------------------------------------------------- | ------------------------------------ | - | ------ | ------ | ---- | - | ---- | --- |  | - | ------ | ---- | -
|                                                                        |                                      |   | 2002   |        | 2001 |   | 2000
|                                                                        |                                      |   |        |        |      |   |     
|Federal income tax expense (benefit) at statutory rates (34%)           |                                      | $ | (5,890 | )      |      | $ | 793  |     |  | $ | 1,127  |     
|Operating income in our consolidated return offset by NOL
carryforwards |                                      |   | (2,654 | )      |      |   | (447 | )   |  |   | (1,152 | )   
|Other items, net                                                        |                                      |   | (923   | )      |      |   | (151 | )   |  |   | (247   | )   
|                                                                        |                                      |   |        |        |      |   |      |     |  |   |        |     
|                                                                        | Federal income tax expense (benefit) |   | $      | (9,467 | )    |   | $    | 195 |  |   | $      | (272 | )
|                                                                        |                                      |   |        |        |      |   |      |     |  |   |        |     
|Effective tax rate                                                      |                                      |   | 55     | %      |      |   | 48   | %   |  |   | (8     | %)  
|                                                                        |                                      |   |        |        |      |   |      |     |  |   |        |     

We recovered $.1 million, $0 million and $.3 million in federal income
taxes in 2002, 2001 and 2000, respectively. We paid federal income taxes of
$1.2 million, $.2 million and $0 million in 2002, 2001 and 2000, respectively.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax return purposes. Significant temporary
differences included in our deferred tax assets (liabilities) are as follows at
December 31 (in thousands):

|                                 |                                                  |                                                        |   |         |         |      |   |         |         |  
|-------------------------------- | ------------------------------------------------ | ------------------------------------------------------ | - | ------- | ------- | ---- | - | ------- | ------- | -
|                                 |                                                  |                                                        |   | 2002    |         | 2001
|                                 |                                                  |                                                        |   |         |         |     
|Deferred income tax assets:      |                                                  |                                                        |   |         |         |      |   |        
|                                 | Future policy benefits                           |                                                        | $ | 47,127  |         |      | $ | 34,013  |        
|                                 | Unrealized loss on securities available for sale |                                                        |   |        |         |      |   | 3,991   |        
|                                 | Capital and net operating loss carryforwards     |                                                        |   | 1,255   |         |      |   | 2,482   |        
|                                 | Other  net                                      |                                                        |   |        |         |      |   | 474     |        
|                                 |                                                  |                                                        |   |         |         |      |   |        
|                                 |                                                  | Gross deferred tax assets                              |   |         | 48,382  |      |   |         | 40,960  |  
|                                 | Valuation allowance for deferred tax assets      |                                                        |   |        |         |      |   | (2,844  | )      
|                                 |                                                  |                                                        |   |         |         |      |   |        
|                                 |                                                  | Deferred income tax assets, net of valuation allowance |   |         | 48,382  |      |   |         | 38,116  |  
|                                 |                                                  |                                                        |   |         |         |      |   |        
|Deferred income tax liabilities: |                                                  |                                                        |   |         |         |      |   |        
|                                 | Present value of future profits                  |                                                        |   | (5,083  | )       |      |   | (7,571  | )      
|                                 | Deferred policy acquisition costs                |                                                        |   | (46,013 | )       |      |   | (36,937 | )      
|                                 | Unrealized gain on securities available for sale |                                                        |   | (3,138  | )       |      |   |        |        
|                                 | Other  net                                      |                                                        |   | (580    | )       |      |   |        |        
|                                 |                                                  |                                                        |   |         |         |      |   |        
|                                 |                                                  | Total deferred income tax liabilities                  |   |         | (54,814 | )    |   |         | (44,508 | )
|                                 |                                                  |                                                        |   |         |         |      |   |        
|                                 | Net deferred income tax liabilities              |                                                        | $ | (6,432  | )       |      | $ | (6,392  | )      
|                                 |                                                  |                                                        |   |         |         |      |   |        

As of December 31, 2002, Standard Management and its subsidiaries had
consolidated net capital loss carryforwards of approximately $2.2 million for
tax return purposes, which expire in 2006.

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. Shareholders Equity

Redeemable Preferred Stock

Shareholders have authorized 1,000,000 shares of Preferred Stock. Other
terms, including preferences, voting and conversion rights, may be established
by the Board of Directors.

We authorized 130,000 shares of Preferred Stock as Series A convertible
redeemable preferred (Series A preferred stock). We issued 65,300 shares in
1998 with a stated value of $6.5 million ($100 per share) and redeemed and
cancelled these shares in 2001, resulting in net authorized 870,000 shares of
Preferred Stock.

Treasury Stock

We purchased 22,100 and 240,000 shares of treasury stock for $82 thousand
and $.8 million in 2002 and 2000, respectively under our stock repurchase
program. We did not purchase any shares of treasury stock in 2001 under our
stock repurchase program. At December 31, 2002, we were authorized to purchase
an additional 702,690 shares under this program.

Warrants

The following table represents outstanding warrants to purchase common
stock as of December 31, 2002:

|             |  |                 |  |       |        |             |  |          |         |  |         | 
|------------ |  | --------------- |  | ----- | ------ | ----------- |  | -------- | ------- |  | ------- | 
|             |  |                 |  |       |        | Exercise    |  | Warrants
|Issue Date   |  | Expiration Date |  | Price |        | Outstanding
|             |  |                 |  |       |        |            
|August 1998  |  | August 2005     |  |       | 7.1250 |             |  |          | 20,000  | 
|January 2000 |  | January 2003    |  |       | 4.8750 |             |  |          | 128,500 | 
|October 2000 |  | October 2003    |  |       | 4.0000 |             |  |          | 15,000  | 
|October 2000 |  | October 2007    |  |       | 4.0000 |             |  |          | 220,000 | 
|January 2001 |  | January 2004    |  |       | 3.0000 |             |  |          | 170,000 | 
|January 2002 |  | January 2005    |  |       | 6.0200 |             |  |          | 287,000 | 
|June 2002    |  | June 2005       |  |       | 7.6100 |             |  |          | 89,500  | 
|October 2002 |  | October  2007   |  |       | 4.9200 |             |  |          | 10,000  | 
|             |  |                 |  |       |        |             |  |          |         |  |         | 
|             |  |                 |  |       |        |             |  |          |         |  | 940,000 | 
|             |  |                 |  |       |        |             |  |          |         |  |         | 

Changes in Shares of Common Stock and Treasury Stock

The following table represents changes in the number of common and
treasury shares as of December 31:

|                                               |                            |  |      |            |      |  |      |            |   |  |  |            |  
|---------------------------------------------- | -------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                                               |                            |  | 2002 |            | 2001 |  | 2000
|                                               |                            |  |      |            |      |  |     
|Common Stock (Authorized - 20,000,000 shares): |                            |  |      |            |      |  |      |            |   |  |  |           
|                                               | Balance, beginning of year |  |      | 9,039,471  |      |  |      | 9,038,134  |   |  |  | 9,038,134  |  
|                                               | Issuance of common stock   |  |      | 330,281    |      |  |      | 1,337      |   |  |  |           |  
|                                               |                            |  |      |            |      |  |      |            |   |  |  |           
|                                               | Balance, end of year       |  |      | 9,369,752  |      |  |      | 9,039,471  |   |  |  | 9,038,134  |  
|                                               |                            |  |      |            |      |  |      |            |   |  |  |           
|Treasury Stock:                                |                            |  |      |            |      |  |      |            |   |  |  |           
|                                               | Balance, beginning of year |  |      | (1,492,978 | )    |  |      | (1,492,978 | ) |  |  | (1,252,978 | )
|                                               | Treasury stock acquired    |  |      | (22,100    | )    |  |      |           |   |  |  | (240,000   | )
|                                               |                            |  |      |            |      |  |      |            |   |  |  |           
|                                               | Balance, end of year       |  |      | (1,515,078 | )    |  |      | (1,492,978 | ) |  |  | (1,492,978 | )
|                                               |                            |  |      |            |      |  |      |            |   |  |  |           

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. Shareholders Equity (continued)

Unrealized Gain (Loss) on Securities

The components of unrealized gain (loss) on securities available for sale
in shareholders equity are summarized as follows at December 31 (in
thousands):

|                                                |                                                               |                                                             |           |        |        |      |         |        |        |  
|----------------------------------------------- | ------------------------------------------------------------- | ----------------------------------------------------------- | --------- | ------ | ------ | ---- | ------- | ------ | ------ | -
|                                                |                                                               |                                                             |           | 2002   |        | 2001
|                                                |                                                               |                                                             |           |        |        |     
|Fair value of securities available for sale     |                                                               | $                                                           | 1,379,792 |        |        | $    | 920,937 |       
|Amortized cost of securities available for sale |                                                               |                                                             | 1,350,961 |        |        |      | 930,824 |       
|                                                |                                                               |                                                             |           |        |        |      |         |       
|                                                | Gross unrealized gain (loss) on securities available for sale |                                                             |           | 28,831 |        |      |         | (9,887 | )     
|Adjustments for:                                |                                                               |                                                             |           |        |        |      |         |       
|                                                | Deferred policy acquisition costs                             |                                                             |           | (6,942 | )      |      |         | 2,468  |       
|                                                | Present value of future profits                               |                                                             |           | (4,113 | )      |      |         | 1,410  |       
|                                                | Deferred federal income taxes                                 |                                                             |           | (6,075 | )      |      |         | 2,080  |       
|                                                | Other                                                         |                                                             |           | 38     |        |      |         |       |       
|                                                |                                                               |                                                             |           |        |        |      |         |       
|                                                |                                                               | Net unrealized gain (loss) on securities available for sale |           | $      | 11,739 |      |         | $      | (3,929 | )
|                                                |                                                               |                                                             |           |        |        |      |         |       

Foreign Exchange Translation Adjustment

There was no foreign exchange translation adjustment at December 31, 2002
due to the sale of our international operations. The foreign exchange
translation adjustment was ($2.2) million at December 31, 2001.

7. Stock Option Plan

Effective June 12, 2002, we adopted the 2002 Stock Incentive Plan which
authorizes the granting of options to employees, directors and consultants of
the Company to purchase up to 990,000 shares of SMC common stock at a price not
less than its market value on the date the option is granted. The number of
shares of stock available for issuance pursuant to the Plan is automatically
increased on the first trading day of each calendar year beginning January 1,
2003, by an amount equal to 3% of the shares of stock outstanding on the
trading day immediately preceding January 1. Options may not be granted under
the 2002 Stock Incentive Plan on a date that is more than ten years from the
date of its adoption. The options may become exercisable immediately or over a
period of time. Any shares subject to an option which for any reason expires or
is terminated unexercised may again be subject to an option under the Plan.
The 2002 Stock Incentive Plan also permits granting of stock appreciation
rights and restricted stock awards.

The provisions of SFAS No. 123 allows companies to either expense the
estimated fair value of stock options or to continue their current practice and
disclose the pro forma effects on net income and earnings per share had the
fair value of the options been expensed. We have elected to continue our
practice of recognizing compensation expense for our Plan using the intrinsic
value based method of accounting and to provide the required pro forma
information. Plan compensation cost based on fair value at the grant date,
which is consistent with the provisions of SFAS No. 123, would result in pro
forma net income and pro forma earnings per share of the following for the year
ended December 31 (in thousands, except per share amounts):

|                                      |  |      |        |      |  |      |     |  |  |   |       | 
|------------------------------------- |  | ---- | ------ | ---- |  | ---- | --- |  |  | - | ----- | 
|                                      |  | 2002 |        | 2001 |  | 2000
|                                      |  |      |        |      |  |     
|Net income (loss)                     |  | $    | (1,271 | )    |  | $    | 877 |  |  | $ | 4,328 | 
|Earnings per share                    |  |      | (.17   | )    |  |      | .07 |  |  |   | .49   | 
|Earnings per share, assuming dilution |  |      | (.16   | )    |  |      | .07 |  |  |   | .49   | 

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Stock Option Plan (continued)

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-valuation model
with the following weighted-average assumptions:

|                               |  |         |     |         |  |      |     |         |  |  |  |     |   |  |  | 
|------------------------------ |  | ------- | --- | ------- |  | ---- | --- | ------- |  |  |  | --- | - |  |  | 
|                               |  | 2002    |     | 2001    |  | 2000
|                               |  |         |     |         |  |     
|Risk-free interest rates       |  |         | 3.6 | %       |  |      | 5.1 | %       |  |  |  | 6.2 | % |  | 
|Volatility factors             |  |         | .62 |         |  |      | .64 |         |  |  |  | .57 |   | 
|Weighted average expected life |  | 7 years |     | 7 years |  |      |     | 7 years |  | 

The Black-Scholes option-valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Our employee stock options have characteristics significantly
different from those of traded options, and changes in subjective assumptions
can materially affect the fair value estimate, therefore in managements
opinion, the existing models do not provide a reliable single measure of the
fair value of its employee stock options.

A summary of our stock option activity and related information for the
years ended December 31 is as follows:

|                                                               |  |        |           |       |  |                  |      |       |  |        |           |                  |  |   |      |  |  |                  |           |   |  |   |      | 
|-------------------------------------------------------------- |  | ------ | --------- | ----- |  | ---------------- | ---- | ----- |  | ------ | --------- | ---------------- |  | - | ---- |  |  | ---------------- | --------- | - |  | - | ---- | 
|                                                               |  | 2002   |           | 2001  |  | 2000            
|                                                               |  |        |           |       |  |                 
|                                                               |  |        |           |       |  | Weighted-Average |      |       |  |        |           | Weighted-Average |  |   |      |  |  | Weighted-Average
|                                                               |  |        |           |       |  | Exercise         |      |       |  |        |           | Exercise         |  |   |      |  |  | Exercise        
|                                                               |  | Shares |           | Price |  | Shares           |      | Price |  | Shares |           | Price           
|                                                               |  |        |           |       |  |                  |      |       |  |        |           |                 
|Options outstanding, beginning
of year                         |  |        | 2,461,933 |       |  | $                | 6.03 |       |  |        | 2,398,258 |                  |  | $ | 6.09 |  |  |                  | 2,411,882 |   |  | $ | 6.10 | 
|Exercised                                                      |  |        | (106,385  | )     |  |                  | 5.81 |       |  |        | (1,575    | )                |  |   | 4.55 |  |  |                  | (525      | ) |  |   | 4.17 | 
|Granted                                                        |  |        | 65,000    |       |  |                  | 4.25 |       |  |        | 84,300    |                  |  |   | 4.07 |  |  |                  | 7,500     |   |  |   | 4.58 | 
|Expired or forfeited                                           |  |        | (10,679   | )     |  |                  | 4.11 |       |  |        | (19,050   | )                |  |   | 6.03 |  |  |                  | (20,599   | ) |  |   | 5.98 | 
|                                                               |  |        |           |       |  |                  |      |       |  |        |           |                  |  |   |      |  |  |                  |           |   |  |   |      | 
|Options outstanding, end of year                               |  |        | 2,409,869 |       |  |                  | 6.00 |       |  |        | 2,461,933 |                  |  |   | 6.03 |  |  |                  | 2,398,258 |   |  |   | 6.09 | 
|                                                               |  |        |           |       |  |                  |      |       |  |        |           |                  |  |   |      |  |  |                  |           |   |  |   |      | 
|Options exercisable, end of year                               |  |        | 2,351,436 |       |  |                  |      |       |  |        | 2,406,733 |                  |  |   |      |  |  |                  | 2,190,658 |   |  |   |      | 
|                                                               |  |        |           |       |  |                  |      |       |  |        |           |                  |  |   |      |  |  |                  |           |   |  |   |      | 
|Weighted-average fair value of
options
granted during the year |  | $      | 2.71      |       |  |                  |      |       |  | $      | 2.71      |                  |  |   |      |  |  | $                | 2.93      |   |  |   |      | 
|                                                               |  |        |           |       |  |                  |      |       |  |        |           |                  |  |   |      |  |  |                  |           |   |  |   |      | 

Information with respect to stock options outstanding at December 31, 2002
is as follows:

|         |  |                     |           |                     |  |                  |   |                  |  |        |      |          |  |                  |           |  |  |   |      | 
|-------- |  | ------------------- | --------- | ------------------- |  | ---------------- | - | ---------------- |  | ------ | ---- | -------- |  | ---------------- | --------- |  |  | - | ---- | 
|         |  | Options Outstanding |           | Options Exercisable
|         |  |                     |           |                    
|         |  |                     |           |                     |  | Weighted-Average |   |                  |  |        |      |          |  |                  |           |  |  |  
|Range of |  |                     |           |                     |  | Remaining        |   | Weighted-Average |  |        |      |          |  | Weighted-Average
|Exercise |  |                     |           |                     |  | Contractual      |   | Exercise         |  | Number |      | Exercise
|Prices   |  | Number Outstanding  |           | Life (years)        |  | Price            |   | Exercisable      |  | Price 
|         |  |                     |           |                     |  |                  |   |                  |  |       
|$3-5     |  |                     | 413,587   |                     |  |                  | 5 |                  |  | $      | 4.26 |          |  |                  | 362,320   |  |  | $ | 4.31 | 
|5-7      |  |                     | 1,523,900 |                     |  |                  | 5 |                  |  |        | 6.05 |          |  |                  | 1,516,733 |  |  |   | 6.05 | 
|7-9      |  |                     | 454,533   |                     |  |                  | 3 |                  |  |        | 7.28 |          |  |                  | 454,533   |  |  |   | 7.28 | 
|9-11     |  |                     | 17,849    |                     |  |                  | 1 |                  |  |        | 9.43 |          |  |                  | 17,850    |  |  |   | 9.43 | 
|         |  |                     |           |                     |  |                  |   |                  |  |        |      |          |  |                  |           |  |  |   |      | 
|         |  |                     | 2,409,869 |                     |  |                  |   |                  |  |        |      |          |  |                  | 2,351,436 |  |  |   |      | 
|         |  |                     |           |                     |  |                  |   |                  |  |        |      |          |  |                  |           |  |  |   |      | 

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Reinsurance

Standard Life and Dixie Life (U.S. life insurance subsidiaries) have
entered into reinsurance agreements with non-affiliated companies to limit the
net loss arising from large risks, maintain their exposure to loss within
capital resources, and provide additional capacity for future growth. The
maximum amount of life insurance face amount retained on any one life ranges
from $30,000 to $150,000. Amounts of standard risk in excess of that limit are
reinsured.

Reinsurance premiums ceded to other insurers were $3.0 million, $4.4
million and $4.8 million in 2002, 2001 and 2000, respectively. Reinsurance
ceded has reduced benefits and claims incurred by $5.2 million, $5.9 million
and $6.3 million in 2002, 2001 and 2000, respectively. A contingent liability
exists to the extent any of the reinsuring companies are unable to meet their
obligations under the reinsurance agreements. To minimize exposure to
significant losses from reinsurance insolvencies, we evaluate the financial
condition of our reinsurers and monitor concentrations of credit risk arising
from similar geographic regions, activities or economic characteristics of the
reinsurers. Based on our periodic reviews of these companies, we believe the
assuming companies are able to honor all contractual commitments under the
reinsurance agreements.

At December 31, 2002 SCOR Life U.S. Insurance Company, our largest annuity
reinsurer, which is rated A- (Excellent) by A.M. Best, represented $20.1
million, or 52% of our total reinsurance recoverable.

9. Related Party Transactions

On October 28, 1997, we made an interest-free loan to one of our officers.
The principal balance of the loan was $775,500 at December 31, 2002 and 2001,
respectively. Repayment is due within 10 days of voluntary termination or
resignation as an officer. In the event of a termination of the officers
employment following a change in control, the loan is deemed to be forgiven.

On November 1, 2002, in connection with the purchase of PCA we incurred
obligations to the former majority owner for $20 thousand and $75 thousand,
bearing interest at 10% per annum, and due 6 months and 12 months, respectively
from the date of purchase. The former majority owner is a current officer of
U.S. Health Services.

10. Commitments and Contingencies

Lease Commitments

We rent office and storage space under noncancellable operating leases and
we incurred rent expense for operating leases of $.5 million, $.8 million and
$1.0 million in 2002, 2001 and 2000, respectively.

Future required minimum rental payments, by year and in the aggregate,
under operating leases as of December 31, 2002, are as follows (in thousands):

|                             |  |   |     | 
|---------------------------- |  | - | --- | 
|2003                         |  | $ | 319 | 
|2004                         |  |   | 251 | 
|2005                         |  |   | 160 | 
|2006                         |  |   | 147 | 
|2007                         |  |   | 74  | 
|                             |  |   |     | 
|Total minimum lease payments |  | $ | 951 | 
|                             |  |   |     | 

Employment Agreements

Certain officers are employed pursuant to executive employment agreements
that create certain liabilities in the event of the termination of the covered
executives following a change in control of Standard Management. The commitment
under these agreements is approximately three times their current annual
salaries. Additionally, following termination due to a change in control, each
executive is entitled to receive a lump sum payment equal to all unexercised
stock options granted multiplied by the highest per share fair market value
during the six month period ending on the date of termination. There were
unexercised options outstanding to these executives to buy 1,852,880 shares at
December 31, 2002.

11. Litigation

We are involved in various legal proceedings in the normal course of
business. In most cases, such proceedings involve claims under insurance
policies or other contracts of Standard Management. The outcomes of these legal
proceedings are not expected to have a material adverse effect on the
consolidated financial position, liquidity or future results of operations of
Standard Management based on our current understanding of the relevant facts
and law.

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. Statutory Accounting Information of Subsidiaries

Our U.S. life insurance subsidiaries maintain their records in conformity
with statutory accounting practices prescribed or permitted by state insurance
regulatory authorities. Statutory accounting practices differ in certain
respects from GAAP. In consolidation, adjustments have been made to conform
our domestic subsidiaries accounts with GAAP.

Our U.S. life insurance subsidiaries had consolidated statutory capital
and surplus of $58.9 and $43.9 million at December 31, 2002 and 2001,
respectively. Income excluding realized capital gains and losses of our U.S.
life insurance subsidiaries on a statutory basis is $4.1 million, $4.2 million
and, $1.7 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Net income (loss) of our U.S. life insurance subsidiaries on a
statutory basis is ($8.4) million, $.1 million and $1.5 million for the years
ended December 31, 2002, 2001 and 2000, respectively.

State insurance regulatory authorities impose minimum risk-based capital
requirements on insurance enterprises that were developed by the National
Association of Insurance Commissioners (NAIC). The formulas for determining
the amount of risk-based capital (RBC) specify various weighting factors that
are applied to financial balances or various levels of activity based on the
perceived degree of investment and insurance risks. Regulatory compliance is
determined by a ratio (the Ratio) of the enterprises regulatory total
adjusted capital, as defined by the NAIC, to its authorized control level RBC,
as defined by the NAIC. Enterprises below specific trigger points or ratios
are classified within certain levels, each of which requires specified
corrective action. At December 31, 2002, the RBC Ratios of Standard Life and
Dixie Life were both at least one and a half times greater than the levels at
which company action is required.

Codified statutory accounting practices (Codification) were implemented
on January 1, 2001 by the NAIC. Codification changes, to some extent,
prescribed statutory accounting practices which we use to prepare our
statutory-basis financial statements.

We loaned $27.0 million to Standard Life pursuant to an Unsecured Surplus
Debenture Agreement (Surplus Debenture) which requires Standard Life to make
quarterly interest payments at a variable corporate base rate plus 2% per
annum, and annual principal payments of $1.0 million per year beginning in 2007
and concluding in 2033. As required by state regulatory authorities, the
balance of the surplus debenture at December 31, 2002 and 2001 of $27.0 million
is classified as a part of capital and surplus of Standard Life. The interest
and principal payments are subject to quarterly approval by the Indiana
Department of Insurance depending upon satisfaction of certain financial tests
relating to the levels of Standard Lifes capital and surplus and general
approval of the Commissioner of the Indiana Department of Insurance.

Our ability to pay operating expenses and meet debt service obligations is
partially dependent upon the amount of dividends received from Standard Life.
Standard Lifes ability to pay cash dividends is, in turn, restricted by law or
subject to approval by the insurance regulatory authorities of Indiana.
Dividends are permitted based on, among other things, the level of the
preceding year statutory surplus and net income. Standard Life did not pay any
dividends in 2002. Standard Life paid $1.6 million and $2.0 million of
dividends in 2001 and 2000, respectively. During 2003, Standard Life can pay
dividends of $5.6 million without regulatory approval; however, the payment of
dividends will require approval from SCOR Life U.S. Insurance Company, a
reinsurer of Standard Life.

13. Operations by Business Segment

Our reportable segments are as follows:

Domestic operations (Continuing operations)includes revenues earned and
expenses incurred from United States operations and includes 1) deposits and/or
income from annuity products (primarily flexible premium deferred annuities,
equity indexed products, universal life products and traditional life products)
and 2) income from the distribution of pharmaceutical products and services.
The profitability for this segment primarily depends on the investment spread
earned (annuities and universal life), the persistency of the in force
business, claim experience, margin on pharmaceutical products, and expense
management.

International operations (Discontinued operations)includes revenues
earned and expenses incurred from abroad, primarily Europe, and includes fees
collected on deposits from unit-linked products. The profitability for this
segment primarily depends on the amount of separate account assets under
management, the management fee charged on those assets and expense management.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. Operations by Business Segment (continued)

The accounting policies of the segments are the same as described in Note
1 (Summary of Significant Accounting Policies). The following segment
presentation contains the same operating data and results the Company uses to
evaluate the performance of the business and provides reconciliations to
consolidated totals for the year ended December 31 (in thousands):

|                                                                                                           |                                                    |                                    |        |           |           |      |        |           |           |   |        |         |           | 
|---------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ---------------------------------- | ------ | --------- | --------- | ---- | ------ | --------- | --------- | - | ------ | ------- | --------- | 
|                                                                                                           |                                                    |                                    |        | 2002      |           | 2001 |        | 2000     
|                                                                                                           |                                                    |                                    |        |           |           |      |        |          
|Revenues:                                                                                                  |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|                                                                                                           | Domestic operations (Continuing operations)        |                                    | $      | 66,431    |           |      | $      | 66,770    |           |   | $      | 61,800  |          
|                                                                                                           | International operations (Discontinued operations) |                                    |        | 3,690     |           |      |        | 8,586     |           |   |        | 8,267   |          
|                                                                                                           |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|                                                                                                           |                                                    | Consolidated Revenues              |        | $         | 70,121    |      |        | $         | 75,356    |   |        | $       | 70,067    | 
|                                                                                                           |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|Net Investment Income:                                                                                     |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|                                                                                                           | Domestic operations (Continuing operations)        |                                    | $      | 75,839    |           |      | $      | 58,539    |           |   | $      | 50,278  |          
|                                                                                                           | International operations (Discontinued operations) |                                    |        | 103       |           |      |        | 461       |           |   |        | 498     |          
|                                                                                                           |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|                                                                                                           |                                                    | Consolidated Net Investment Income |        | $         | 75,942    |      |        | $         | 59,000    |   |        | $       | 50,776    | 
|                                                                                                           |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|Interest Credited to Interest Sensitive Annuities and Other
Financial Products (All Continuing operations) |                                                    | $                                  | 42,650 |           |           | $    | 30,227 |           |           | $ | 21,335 |        
|                                                                                                           |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|Pre-tax Income (Loss):                                                                                     |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|                                                                                                           | Domestic operations (Continuing operations)        |                                    | $      | (17,325   | )         |      | $      | 409       |           |   | $      | 3,276   |          
|                                                                                                           | International operations (Discontinued operations) |                                    |        | 1,618     |           |      |        | 1,381     |           |   |        | 3,128   |          
|                                                                                                           |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|                                                                                                           |                                                    | Consolidated Pre-tax Income (Loss) |        | $         | (15,707   | )    |        | $         | 1,790     |   |        | $       | 6,404     | 
|                                                                                                           |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|Assets:                                                                                                    |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|                                                                                                           | Domestic operations (Continuing operations)        |                                    | $      | 1,715,147 |           |      | $      | 1,183,323 |           |   | $      | 921,727 |          
|                                                                                                           | International operations (Discontinued operations) |                                    |        |          |           |      |        | 430,330   |           |   |        | 548,730 |          
|                                                                                                           |                                                    |                                    |        |           |           |      |        |           |           |   |        |        
|                                                                                                           |                                                    | Consolidated Assets                |        | $         | 1,715,147 |      |        | $         | 1,613,653 |   |        | $       | 1,470,457 | 
|                                                                                                           |                                                    |                                    |        |           |           |      |        |           |           |   |        |        

Revenues by product have not been disclosed because it is impracticable
for us to provide this information. Although premiums and deposits collected
by product are available on a statutory basis, it is impracticable to disclose
revenues by product on a GAAP basis because we do not allocate certain
components of revenues such as net investment income, net realized investment
gains (losses) and fee and other income to our products.

14. Derivative Financial Instruments

We offer equity-indexed annuity products that provide a base rate of
return with a higher potential return linked to the performance of a
broad-based equity index. We buy S&P 500 Index Call Options and DJIA Call
Options (collectively known as the options) in an effort to hedge potential
increases to policyholder benefits resulting from increases in the S&P 500 and
DJIA to which the products returns are linked. The cost of the options is
included in the pricing of the equity-indexed annuity products. The changes in
the value of the options are reflected in net investment income and fluctuate
in relation to changes in interest credited to policyholder account balances
for these annuities.

Total revenues include ($10.1) million, ($5.9) million, and ($7.6)
million in 2002, 2001 and 2000, respectively, related to changes in the fair
value of the options. These investment losses were substantially offset by
amounts credited to policyholder account balances. The fair value of the
options was $3.9 million and $3.5 million at December 31, 2002 and 2001,
respectively. The notional amounts were $227.3 million and $151.9 million at
December 31, 2002 and 2001, respectively.

If the counterparties of the aforementioned financial instruments do not
meet their obligations, we may have to recognize a loss. We limit our exposure
to losses by diversifying among several counterparties believed to be strong
and creditworthy. At December 31, 2002, all of the counterparties were rated
A or higher by Standard & Poors.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

15. Fair Value of Financial Instruments

The following discussion outlines the methods and assumptions we use in
estimating our fair value disclosures for our financial instrument assets and
liabilities. Because fair values for all balance sheet items are not required
to be disclosed pursuant to SFAS No. 107, Disclosures about Fair Values of
Financial Instruments, the aggregate fair value amounts presented herein do
not necessarily represent our underlying value, likewise, care should be
exercised in deriving conclusions about our business or financial condition
based on this fair value information.

Fixed maturity securities:Fair values for fixed maturity securities are
based on quoted market prices from broker-dealers, where available. For fixed
maturity securities not actively traded, fair values are estimated using values
obtained from independent pricing services, or, in the case of private
placements, are estimated by discounting the expected future cash flows using
current market rates applicable to the coupon rate, credit rating and maturity
of the investments.

Derivative securities:The fair values for derivative securities are based
on internal methods developed by our investment advisor.

Mortgage loans and policy loans:The estimated fair values for mortgage
loans and policy loans are estimated using discounted cash flow analyses and
interest rates currently being offered for similar loans to borrowers with
similar credit ratings.

Insurance liabilities for investment contracts:Fair values for our
investment-type insurance contract liabilities are estimated using discounted
cash flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining contracts
being valued. The estimated fair value of the liabilities for investment
contracts was approximately equal to its carrying value at December 31, 2002
and 2001. This is due to 1) credited rates on the vast majority of account
balances approximating current rates paid on similar investments and 2) rates
not generally being guaranteed beyond one year.

Insurance liabilities for non-investment contracts:Fair value disclosures
for our reserves for insurance contracts other than investment-type contracts
are not required and have not been determined. However, we closely monitor the
level of our insurance liabilities and that the fair value of reserves under
all insurance contracts are taken into consideration in the overall management
of interest rate risk.

Mortgage payable, notes payable and trust preferred securities:The
estimated fair values for mortgage payable, notes payable and trust preferred
securities are estimated using discounted cash flow analyses and interest rates
currently being offered for similar loans to borrowers with similar credit
ratings at December 31, 2002. We believe the fair value of our mortgage
payable, notes payable and trust preferred securities was equal to its carrying
value at December 31, 2001 since the interest rates reflect current market
conditions.

The carrying amount of all other financial instruments approximates their
fair values.

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##### Table of Contents



STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

15. Fair Value of Financial Instruments (continued)

The fair value of our financial instruments is shown below using a
summarized version of assets and liabilities at December 31 (in thousands).
Refer to Note 2 for additional information relating to the fair value of
investments.

|             |                                                |                                |                           |           |        |           |          |           |        |           |          |         |        |         |  |         |        |         | 
|------------ | ---------------------------------------------- | ------------------------------ | ------------------------- | --------- | ------ | --------- | -------- | --------- | ------ | --------- | -------- | ------- | ------ | ------- |  | ------- | ------ | ------- | 
|             |                                                |                                |                           |           | 2002   |           | 2001    
|             |                                                |                                |                           |           |        |           |         
|             |                                                |                                |                           |           | Fair   |           | Carrying |           | Fair   |           | Carrying
|             |                                                |                                |                           |           | Value  |           | Amount   |           | Value  |           | Amount  
|             |                                                |                                |                           |           |        |           |          |           |        |           |         
|Assets:      |                                                |                                |                           |           |        |           |          |           |        |           |          |         |        |         |  |        
|             | Investments:                                   |                                |                           |           |        |           |          |           |        |           |          |         |        |         |  |         |       
|             |                                                | Securities available for sale: |                           |           |        |           |          |           |        |           |          |         |        |         |  |         |        |        
|             |                                                |                                | Fixed maturity securities |           | $      | 1,379,792 |          |           | $      | 1,379,792 |          |         | $      | 920,937 |  |         | $      | 920,937 | 
|             |                                                | Mortgage loans on real estate  |                           |           | 7,117  |           |          |           | 6,348  |           |          |         | 6,270  |         |  |         | 5,978  |        
|             |                                                | Policy loans                   |                           |           | 13,162 |           |          |           | 12,722 |           |          |         | 12,524 |         |  |         | 12,946 |        
|             | Cash                                           |                                |                           | 60,197    |        |           |          | 60,197    |        |           |          | 18,144  |        |         |  | 18,144  |       
|Liabilities: |                                                |                                |                           |           |        |           |          |           |        |           |          |         |        |         |  |        
|             | Insurance liabilities for investment contracts |                                |                           | 1,422,628 |        |           |          | 1,422,628 |        |           |          | 932,427 |        |         |  | 932,427 |       
|             | Mortgage payable                               |                                |                           | 6,949     |        |           |          | 6,757     |        |           |          | 6,900   |        |         |  | 6,900   |       
|             | Notes payable                                  |                                |                           | 13,300    |        |           |          | 13,000    |        |           |          | 19,100  |        |         |  | 19,100  |       
|             | Trust preferred securities                     |                                |                           | 17,616    |        |           |          | 20,700    |        |           |          | 20,700  |        |         |  | 20,700  |       

16. Earnings Per Share

A reconciliation of income and shares used to calculate basic and diluted
earnings per share is as follows (dollars in thousands):

|        |                                                                          |                                           |                               |           |         |         |      |           |         |         |   |           |           |           | 
|------- | ------------------------------------------------------------------------ | ----------------------------------------- | ----------------------------- | --------- | ------- | ------- | ---- | --------- | ------- | ------- | - | --------- | --------- | --------- | 
|        |                                                                          |                                           |                               |           | 2002    |         | 2001 |           | 2000   
|        |                                                                          |                                           |                               |           |         |         |      |           |        
|Income: |                                                                          |                                           |                               |           |         |         |      |           |         |         |   |          
|        | Net income (loss)                                                        |                                           | $                             | (1,130    | )       |         | $    | 1,780     |         |         | $ | 5,267     |          
|        | Preferred stock dividends                                                |                                           |                               |          |         |         |      | (318      | )       |         |   | (506      | )        
|        |                                                                          |                                           |                               |           |         |         |      |           |         |         |   |          
|        | Earnings available to common shareholders for basic earnings per
share   |                                           |                               | (1,130    | )       |         |      | 1,462     |         |         |   | 4,761     |          
|        | Effect of dilutive securities:                                           |                                           |                               |           |         |         |      |           |         |         |   |           |          
|        |                                                                          | Interest on subordinated convertible debt |                               |           |        |         |      |           |        |         |   |           | 833       |          
|        |                                                                          |                                           |                               |           |         |         |      |           |         |         |   |          
|        | Earnings available to common shareholders for diluted earnings
per share |                                           | $                             | (1,130    | )       |         | $    | 1,462     |         |         | $ | 5,594     |          
|        |                                                                          |                                           |                               |           |         |         |      |           |         |         |   |          
|Shares: |                                                                          |                                           |                               |           |         |         |      |           |         |         |   |          
|        | Weighted average shares outstanding for basic earnings per share         |                                           |                               | 7,623,690 |         |         |      | 7,545,889 |         |         |   | 7,727,344 |          
|        | Effect of dilutive securities:                                           |                                           |                               |           |         |         |      |           |         |         |   |           |          
|        |                                                                          |                                           | Stock options                 |           |         | 149,254 |      |           |         | 81,221  |   |           |           | 6,081     | 
|        |                                                                          |                                           | Stock warrants                |           |         | 165,610 |      |           |         | 138,268 |   |           |           | 492       | 
|        |                                                                          |                                           | Subordinated convertible debt |           |         |        |      |           |         |        |   |           |           | 1,450,032 | 
|        |                                                                          |                                           |                               |           |         |         |      |           |         |         |   |          
|        |                                                                          | Dilutive potential common shares          |                               |           | 314,864 |         |      |           | 219,489 |         |   |           | 1,456,605 |          
|        |                                                                          |                                           |                               |           |         |         |      |           |         |         |   |          
|        | Weighted average shares outstanding for diluted earnings per share       |                                           |                               | 7,938,554 |         |         |      | 7,765,378 |         |         |   | 9,183,949 |          
|        |                                                                          |                                           |                               |           |         |         |      |           |         |         |   |          

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

17. Quarterly Financial Data (Unaudited) (in thousands, except per share amounts)

Earnings per common and common equivalent share for each quarter are
computed independently of earnings per share for the year. Due to the
transactions affecting the weighted average number of shares outstanding in
each quarter and due to the uneven distribution of earnings during the year,
the sum of the quarterly earnings per share may not equal the earnings per
share for the year.

|                                                      |                                                                |   |               |        |        |   |        |        |        |   |        |        |   |   |        |       | 
|----------------------------------------------------- | -------------------------------------------------------------- | - | ------------- | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | - | - | ------ | ----- | 
|                                                      |                                                                |   | 2002 Quarters
|                                                      |                                                                |   |              
|                                                      |                                                                |   | First         |        | Second |   | Third  |        | Fourth
|                                                      |                                                                |   |               |        |        |   |        |        |       
|Total revenues                                        |                                                                | $ | 22,985        |        |        | $ | 10,114 |        |        | $ | 17,327 |        |   | $ | 19,695 |      
|                                                      |                                                                |   |               |        |        |   |        |        |        |   |        |        |   |   |        |      
|Components of net income (loss):                      |                                                                |   |               |        |        |   |        |        |        |   |        |        |   |   |        |      
|                                                      | Income (loss) from continuing operations                       |   | $             | 1,672  |        |   | $      | 1,829  |        |   | $      | (5,103 | ) |   | $      | 669   | 
|                                                      | Income from discontinued operations                            |   |               | 513    |        |   |        | 4,765  |        |   |        | 2,662  |   |   |        | --    | 
|                                                      | Cumulative effect of accounting change for
goodwill impairment |   |               | (1,212 | )      |   |        |       |        |   |        |       |   |   |        | --    | 
|                                                      | Net realized investment gains (losses)                         |   |               | (181   | )      |   |        | (5,692 | )      |   |        | (1,734 | ) |   |        | 682   | 
|                                                      |                                                                |   |               |        |        |   |        |        |        |   |        |        |   |   |        |      
|                                                      | Net income (loss)                                              |   | $             | 792    |        |   | $      | 902    |        |   | $      | (4,175 | ) |   | $      | 1,351 | 
|                                                      |                                                                |   |               |        |        |   |        |        |        |   |        |        |   |   |        |      
|Net income (loss) per common share                    |                                                                | $ | .11           |        |        | $ | .12    |        |        | $ | (.57   | )      |   | $ | .19    |      
|                                                      |                                                                |   |               |        |        |   |        |        |        |   |        |        |   |   |        |      
|Net income (loss) per common share, assuming
dilution |                                                                | $ | .10           |        |        | $ | .11    |        |        | $ | (.53   | )      |   | $ | .18    |      
|                                                      |                                                                |   |               |        |        |   |        |        |        |   |        |        |   |   |        |      

|                                                      |                                        |   |               |       |        |   |        |       |        |   |        |        |   |   |        |        |  
|----------------------------------------------------- | -------------------------------------- | - | ------------- | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ------ | - | - | ------ | ------ | -
|                                                      |                                        |   | 2001 Quarters
|                                                      |                                        |   |              
|                                                      |                                        |   | First         |       | Second |   | Third  |       | Fourth
|Total revenues                                        |                                        | $ | 19,072        |       |        | $ | 22,543 |       |        | $ | 17,081 |        |   | $ | 16,660 |       
|                                                      |                                        |   |               |       |        |   |        |       |        |   |        |        |   |   |        |       
|Components of net income (loss):                      |                                        |   |               |       |        |   |        |       |        |   |        |        |   |   |        |       
|                                                      | Income from continuing operations      |   | $             | 1,517 |        |   | $      | 1,502 |        |   | $      | 1,368  |   |   | $      | 860    |  
|                                                      | Income from discontinued operations    |   |               | 469   |        |   |        | 593   |        |   |        | 618    |   |   |        | 402    |  
|                                                      | Net realized investment gains (losses) |   |               | 14    |        |   |        | (161  | )      |   |        | (1,645 | ) |   |        | (3,757 | )
|                                                      |                                        |   |               |       |        |   |        |       |        |   |        |        |   |   |        |       
|                                                      | Net income (loss)                      |   | $             | 2,000 |        |   | $      | 1,934 |        |   | $      | 341    |   |   | $      | (2,495 | )
|                                                      |                                        |   |               |       |        |   |        |       |        |   |        |        |   |   |        |       
|Net income (loss) per common share                    |                                        | $ | .26           |       |        | $ | .26    |       |        | $ | .05    |        |   | $ | (.33   | )     
|                                                      |                                        |   |               |       |        |   |        |       |        |   |        |        |   |   |        |       
|Net income (loss) per common share, assuming
dilution |                                        | $ | .24           |       |        | $ | .23    |       |        | $ | .04    |        |   | $ | (.33   | )     
|                                                      |                                        |   |               |       |        |   |        |       |        |   |        |        |   |   |        |       

Reporting the results of insurance operations on a quarterly basis
requires the use of numerous estimates throughout the year, primarily in the
computation of reserves, amortization of deferred policy acquisition costs and
present value of future profits, and the effective rate for income taxes. It
is our practice to review estimates at the end of each quarter and, if
necessary, make appropriate adjustments, with the effect of such adjustments
being reported in current operations. Only at year-end are we able to assess
the accuracy of our previous quarterly estimates. Our fourth quarter results
include the effect of the difference between previous estimates and actual
year-end results. Therefore, the results of an interim period may not be
indicative of the results of the entire year.

The quarterly financial data differs from our filed Form 10-Qs due to the
adoption of SFAS No. 142 and due to the International Operations being recorded
in Discontinued Operations.

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##### Table of Contents



Schedule II  Condensed Financial Information of Registrant

STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)

CONDENSED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)

|                                                                               |                                                           |                                                                                        |                                         |                                            |         |             |         |        |        |        |         | 
|------------------------------------------------------------------------------ | --------------------------------------------------------- | -------------------------------------------------------------------------------------- | --------------------------------------- | ------------------------------------------ | ------- | ----------- | ------- | ------ | ------ | ------ | ------- | 
|                                                                               |                                                           |                                                                                        |                                         |                                            |         | December 31
|                                                                               |                                                           |                                                                                        |                                         |                                            |         |            
|                                                                               |                                                           |                                                                                        |                                         |                                            |         | 2002        |         | 2001  
|                                                                               |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|ASSETS                                                                         |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|Investments:                                                                   |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|                                                                               |                                                           | Investment in subsidiaries                                                             |                                         | $                                          | 111,033 |             |         | $      | 78,646 |       
|                                                                               |                                                           | Surplus debenture due from Standard Life                                               |                                         |                                            | 27,000  |             |         |        | 27,000 |       
|                                                                               |                                                           | Equity securities available for sale, at fair value (cost: $32 in 2002 and $7 in 2001) |                                         |                                            | 32      |             |         |        | 7      |       
|                                                                               |                                                           | Real estate                                                                            |                                         |                                            | 90      |             |         |        | 115    |       
|                                                                               |                                                           | Notes receivable from officers and directors                                           |                                         |                                            | 776     |             |         |        | 776    |       
|                                                                               |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|                                                                               |                                                           |                                                                                        |                                         | Total investments                          |         |             | 138,931 |        |        |        | 106,544 | 
|Cash and cash equivalents                                                      |                                                           |                                                                                        | 1,608                                   |                                            |         |             | 339     |       
|Property and equipment, less depreciation of $3,271 in 2002 and $2,171 in 2001 |                                                           |                                                                                        | 11,282                                  |                                            |         |             | 11,665  |       
|Note receivable from affiliate                                                 |                                                           |                                                                                        |                                        |                                            |         |             | 2,858   |       
|Amounts receivable from subsidiaries                                           |                                                           |                                                                                        | 5,154                                   |                                            |         |             | 3,148   |       
|Other assets                                                                   |                                                           |                                                                                        | 3,645                                   |                                            |         |             | 1,563   |       
|                                                                               |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|                                                                               |                                                           |                                                                                        |                                         | Total assets                               |         | $           | 160,620 |        |        | $      | 126,117 | 
|                                                                               |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|LIABILITIES AND SHAREHOLDERS EQUITY                                           |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|Liabilities:                                                                   |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|                                                                               | Notes payable                                             |                                                                                        | $                                       | 12,500                                     |         |             | $       | 19,100 |       
|                                                                               | Note payable to affiliate                                 |                                                                                        |                                         |                                           |         |             |         | 2,858  |       
|                                                                               | Capital lease obligations                                 |                                                                                        |                                         | 804                                        |         |             |         | 1,152  |       
|                                                                               | Mortgage payable                                          |                                                                                        |                                         | 6,757                                      |         |             |         | 6,900  |       
|                                                                               | Amounts due to subsidiaries                               |                                                                                        |                                         | 30,748                                     |         |             |         | 3,148  |       
|                                                                               | Other liabilities                                         |                                                                                        |                                         | 1,377                                      |         |             |         | 2,070  |       
|                                                                               |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|                                                                               |                                                           |                                                                                        |                                         | Total liabilities                          |         |             | 52,186  |        |        |        | 35,228  | 
|Company-obligated trust preferred securities                                   |                                                           |                                                                                        | 20,700                                  |                                            |         |             | 20,700  |       
|Shareholders Equity:                                                          |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|                                                                               | Preferred stock, no par value                             |                                                                                        |                                         |                                           |         |             |         |       |       
|                                                                               | Common stock and additional paid-in capital, no par value |                                                                                        |                                         | 63,857                                     |         |             |         | 63,011 |       
|                                                                               | Treasury stock, at cost                                   |                                                                                        |                                         | (7,671                                     | )       |             |         | (7,589 | )     
|                                                                               | Accumulated other comprehensive loss:                     |                                                                                        |                                         |                                            |         |             |         |        |       
|                                                                               |                                                           | Unrealized gain (loss) on securities                                                   |                                         |                                            | 11,739  |             |         |        | (3,927 | )     
|                                                                               |                                                           |                                                                                        | Foreign currency translation adjustment |                                            |         |            |         |        |        | (2,245 | )      
|                                                                               | Retained earnings                                         |                                                                                        |                                         | 19,809                                     |         |             |         | 20,939 |       
|                                                                               |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|                                                                               |                                                           |                                                                                        |                                         | Total shareholders equity                 |         |             | 87,734  |        |        |        | 70,189  | 
|                                                                               |                                                           |                                                                                        |                                         |                                            |         |             |         |       
|                                                                               |                                                           |                                                                                        |                                         | Total liabilities and shareholders equity |         | $           | 160,620 |        |        | $      | 126,117 | 
|                                                                               |                                                           |                                                                                        |                                         |                                            |         |             |         |       

See accompanying notes to condensed financial statements

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Schedule II  Condensed Financial Information of Registrant  (continued)

STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)

CONDENSED STATEMENTS OF INCOME
(Dollars in Thousands)

|                                                                                                                                    |                                                                       |                |        |                        |        |      |       |        |       |   |        |       |       | 
|----------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | -------------- | ------ | ---------------------- | ------ | ---- | ----- | ------ | ----- | - | ------ | ----- | ----- | 
|                                                                                                                                    |                                                                       |                |        | Year Ended December 31
|                                                                                                                                    |                                                                       |                |        |                       
|                                                                                                                                    |                                                                       |                |        | 2002                   |        | 2001 |       | 2000  
|                                                                                                                                    |                                                                       |                |        |                        |        |      |       |       
|Revenues:                                                                                                                           |                                                                       |                |        |                        |        |      |       |        |       |   |        |      
|                                                                                                                                    | Management fees from subsidiaries                                     |                | $      | 3,500                  |        |      | $     | 4,750  |       |   | $      | 3,850 |      
|                                                                                                                                    | Interest income from subsidiaries                                     |                |        | 1,915                  |        |      |       | 2,615  |       |   |        | 3,209 |      
|                                                                                                                                    | Rental income from subsidiaries                                       |                |        | 1,854                  |        |      |       | 1,100  |       |   |        | 1,100 |      
|                                                                                                                                    | Other income                                                          |                |        | 15                     |        |      |       | 40     |       |   |        | 409   |      
|                                                                                                                                    | Net realized investment losses                                        |                |        | (1,001                 | )      |      |       | (1,310 | )     |   |        | (820  | )    
|                                                                                                                                    |                                                                       |                |        |                        |        |      |       |        |       |   |        |      
|                                                                                                                                    |                                                                       | Total revenues |        |                        | 6,283  |      |       |        | 7,195 |   |        |       | 7,748 | 
|Expenses:                                                                                                                           |                                                                       |                |        |                        |        |      |       |        |       |   |        |      
|                                                                                                                                    | Operating expenses                                                    |                |        | 5,548                  |        |      |       | 4,332  |       |   |        | 4,487 |      
|                                                                                                                                    | Interest expense and financing costs                                  |                |        | 4,767                  |        |      |       | 3,519  |       |   |        | 3,416 |      
|                                                                                                                                    | Interest expense on note payable to affiliate                         |                |        | 50                     |        |      |       | 125    |       |   |        | 179   |      
|                                                                                                                                    |                                                                       |                |        |                        |        |      |       |        |       |   |        |      
|                                                                                                                                    |                                                                       | Total expenses |        |                        | 10,365 |      |       |        | 7,976 |   |        |       | 8,082 | 
|                                                                                                                                    |                                                                       |                |        |                        |        |      |       |        |       |   |        |      
|Loss before federal income taxes, equity in earnings of
consolidated subsidiaries, extraordinary loss and
preferred stock dividends |                                                                       |                | (4,082 | )                      |        |      | (781  | )      |       |   | (334   | )    
|Federal income tax benefit                                                                                                          |                                                                       |                | (2,353 | )                      |        |      | (34   | )      |       |   | (1,145 | )    
|                                                                                                                                    |                                                                       |                |        |                        |        |      |       |        |       |   |        |      
|Income (loss) before equity in earnings of consolidated
subsidiaries, extraordinary loss and preferred stock
dividends              |                                                                       |                | (1,729 | )                      |        |      | (747  | )      |       |   | 811    |      
|Equity in earnings of consolidated subsidiaries                                                                                     |                                                                       |                | 599    |                        |        |      | 2,527 |        |       |   | 4,815  |      
|                                                                                                                                    |                                                                       |                |        |                        |        |      |       |        |       |   |        |      
|                                                                                                                                    | Income (loss) before extraordinary loss and
preferred stock dividends |                |        | (1,130                 | )      |      |       | 1,780  |       |   |        | 5,626 |      
|Extraordinary loss                                                                                                                  |                                                                       |                |       |                        |        |      |      |        |       |   | (359   | )    
|                                                                                                                                    |                                                                       |                |        |                        |        |      |       |        |       |   |        |      
|Net income (loss)                                                                                                                   |                                                                       |                | (1,130 | )                      |        |      | 1,780 |        |       |   | 5,267  |      
|Preferred stock dividends                                                                                                           |                                                                       |                |       |                        |        |      | (318  | )      |       |   | (506   | )    
|                                                                                                                                    |                                                                       |                |        |                        |        |      |       |        |       |   |        |      
|Earnings available to common shareholders                                                                                           |                                                                       | $              | (1,130 | )                      |        | $    | 1,462 |        |       | $ | 4,761  |      
|                                                                                                                                    |                                                                       |                |        |                        |        |      |       |        |       |   |        |      

See accompanying notes to condensed financial statements

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##### Table of Contents



Schedule II  Condensed Financial Information of Registrant  (continued)

STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)

|                                                     |                                       |                                                  |         |                        |        |      |         |         |       |   |         |        |        |  
|---------------------------------------------------- | ------------------------------------- | ------------------------------------------------ | ------- | ---------------------- | ------ | ---- | ------- | ------- | ----- | - | ------- | ------ | ------ | -
|                                                     |                                       |                                                  |         | Year Ended December 31
|                                                     |                                       |                                                  |         |                       
|                                                     |                                       |                                                  |         | 2002                   |        | 2001 |         | 2000   
|                                                     |                                       |                                                  |         |                        |        |      |         |        
|Operating Activities                                 |                                       |                                                  |         |                        |        |      |         |         |       |   |         |       
|Net income (loss)                                    |                                       | $                                                | (1,130  | )                      |        | $    | 1,780   |         |       | $ | 5,267   |       
|                                                     | Change in deferred income taxes       |                                                  |         | (1,481                 | )      |      |         |        |       |   |         |       |       
|                                                     | Depreciation and amortization         |                                                  |         | 1,391                  |        |      |         | 801     |       |   |         | 650    |       
|                                                     | Equity in earnings of subsidiaries    |                                                  |         | (599                   | )      |      |         | (2,527  | )     |   |         | (4,815 | )     
|                                                     | Dividends                             |                                                  |         |                       |        |      |         | 2,100   |       |   |         | 2,500  |       
|                                                     | Net realized investment losses        |                                                  |         | 1,001                  |        |      |         | 1,310   |       |   |         | 820    |       
|                                                     | Other                                 |                                                  |         | 633                    |        |      |         | (355    | )     |   |         | (909   | )     
|                                                     |                                       |                                                  |         |                        |        |      |         |         |       |   |         |       
|                                                     |                                       | Net cash provided (used) by operating activities |         |                        | (185   | )    |         |         | 3,109 |   |         |        | 3,513  |  
|Investing Activities                                 |                                       |                                                  |         |                        |        |      |         |         |       |   |         |       
|Investments, net                                     |                                       |                                                  | (18     | )                      |        |      | (321    | )       |       |   | 98      |       
|Capital contribution to Standard Life                |                                       |                                                  | (15,000 | )                      |        |      |        |         |       |   |        |       
|Purchase of HomeMed Channel, Inc.                    |                                       |                                                  | (1,025  | )                      |        |      |        |         |       |   |        |       
|Purchase of PCA                                      |                                       |                                                  | (190    | )                      |        |      |        |         |       |   |        |       
|Purchase of property and equipment, net              |                                       |                                                  | (777    | )                      |        |      | (12,250 | )       |       |   | (1,004  | )     
|                                                     |                                       |                                                  |         |                        |        |      |         |         |       |   |         |       
|                                                     | Net cash used by investing activities |                                                  |         | (17,010                | )      |      |         | (12,571 | )     |   |         | (906   | )     
|Financing Activities                                 |                                       |                                                  |         |                        |        |      |         |         |       |   |         |       
|Borrowings                                           |                                       |                                                  | 200     |                        |        |      | 26,218  |         |       |   | 11,000  |       
|Borrowings from
affiliates                           |                                       |                                                  | 25,321  |                        |        |      | 2,534   |         |       |   |        |       
|Repayments of notes payable and preferred stock      |                                       |                                                  | (6,942  | )                      |        |      | (18,930 | )       |       |   | (14,000 | )     
|Issuance of common stock and warrants                |                                       |                                                  | (33     | )                      |        |      | (8      | )       |       |   | 867     |       
|Purchase of common stock for treasury                |                                       |                                                  | (82     | )                      |        |      |        |         |       |   | (304    | )     
|Dividends on preferred stock                         |                                       |                                                  |        |                        |        |      | (318    | )       |       |   | (506    | )     
|                                                     |                                       |                                                  |         |                        |        |      |         |         |       |   |         |       
|                                                     |                                       | Net cash provided (used) by financing activities |         |                        | 18,464 |      |         |         | 9,496 |   |         |        | (2,943 | )
|                                                     |                                       |                                                  |         |                        |        |      |         |         |       |   |         |       
|Net increase (decrease) in cash and cash equivalents |                                       |                                                  | 1,269   |                        |        |      | 34      |         |       |   | (336    | )     
|Cash and cash equivalents at beginning of year       |                                       |                                                  | 339     |                        |        |      | 305     |         |       |   | 641     |       
|                                                     |                                       |                                                  |         |                        |        |      |         |         |       |   |         |       
|Cash and cash equivalents at end of year             |                                       | $                                                | 1,608   |                        |        | $    | 339     |         |       | $ | 305     |       
|                                                     |                                       |                                                  |         |                        |        |      |         |         |       |   |         |       

See accompanying notes to condensed financial statements

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##### Table of Contents



Schedule IICondensed Financial Information of Registrant (continued)

STANDARD MANAGEMENT CORPORATION
(PARENT COMPANY)

NOTES TO CONDENSED FINANCIAL STATEMENTS

December 31, 2002

1. Basis of Presentation

For purposes of these condensed financial statements, Standard Management
carries its investments in subsidiaries at cost plus equity in undistributed
earnings of subsidiaries since date of acquisition. Net income of its
subsidiaries is included in income using the equity method. These condensed
financial statements should be read in conjunction with our consolidated
financial statements included elsewhere in this document.

2. Dividends from Subsidiaries

Standard Management did not receive any dividends from its subsidiaries in
2002. We received $1.6 million and $2.0 million of dividends from subsidiaries
in 2001 and 2000, respectively.

3. Amounts due to subsidiaries

We have $25.6 million of outstanding affiliated borrowings at December 31, 2002
pursuant to a Revolving Line of Credit Agreement of $30.0 million in the form
of a revolving loan arrangement between Standard Management Financial
Corporation and the Company. Borrowings under the Revolving Line of Credit
Agreement may be used for general corporate purposes and to repay outstanding
debt. The outstanding balance bears interest equal to the prime rate and
interest payments are payable quarterly.

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##### Table of Contents



Schedule IV  Reinsurance

STANDARD MANAGEMENT CORPORATION

Years Ended December 31, 2002, 2001 and 2000
(Dollars in Thousands)

|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |            |  | 
|---------------------------- | ------------------------------------------------- | -------------- | --------- | ------ | ------ | -------------- | ------- | -------------------- | ----- | ---------- | ------ | ------ | --- | ------- | --------- | ----- | ----- |  | ----- | ---------- |  | 
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       | Percentage
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       | of Amount 
|                             |                                                   |                |           | Gross  |        | Ceded to Other |         | Assumed              |       |            |        |        |     | Assumed
|                             |                                                   |                |           | Amount |        | Companies      |         | From Other Companies |       | Net Amount |        | to Net
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |       
|Year Ended December 31, 2002 |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|Life insurance in force      |                                                   | $              | 1,089,067 |        |        | $              | 543,782 |                      |       | $          | 73,145 |        |     | $       | 618,430   |       |       |  | 11.83 | %         
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|Premiums:                    |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|                             | Life insurance and annuities                      |                | $         | 10,079 |        |                | $       | 2,946                |       |            | $      | 785    |     |         | $         | 7,918 |       |  |       |            | 
|                             | Accident and health insurance                     |                |           | 13     |        |                |         | 10                   |       |            |        |       |     |         |           | 3     |       |  |       |            | 
|                             | Supplementary contract and other funds
on deposit |                |           | 1,270  |        |                |         |                     |       |            |        |       |     |         |           | 1,270 |       |  |       |            | 
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|                             |                                                   | Total premiums |           | $      | 11,362 |                |         | $                    | 2,956 |            |        | $      | 785 |         |           | $     | 9,191 |  |       |            |  | 
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|Year Ended December 31, 2001 |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|Life insurance in force      |                                                   | $              | 1,309,989 |        |        | $              | 647,053 |                      |       | $          | 81,633 |        |     | $       | 744,569   |       |       |  | 10.96 | %         
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|Premiums:                    |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|                             | Life insurance and annuities                      |                | $         | 11,912 |        |                | $       | 4,381                |       |            | $      | 796    |     |         | $         | 8,327 |       |  |       |            | 
|                             | Accident and health insurance                     |                |           | 370    |        |                |         | 10                   |       |            |        |       |     |         |           | 360   |       |  |       |            | 
|                             | Supplementary contract and other funds
on deposit |                |           | 789    |        |                |         |                     |       |            |        |       |     |         |           | 789   |       |  |       |            | 
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|                             |                                                   | Total premiums |           | $      | 13,071 |                |         | $                    | 4,391 |            |        | $      | 796 |         |           | $     | 9,476 |  |       |            |  | 
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|Year Ended December 31, 2000 |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|Life insurance in force      |                                                   | $              | 1,739,302 |        |        | $              | 787,590 |                      |       | $          | 90,854 |        |     | $       | 1,042,566 |       |       |  | 8.71  | %         
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|Premiums:                    |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|                             | Life insurance and annuities                      |                | $         | 11,634 |        |                | $       | 4,783                |       |            | $      | 937    |     |         | $         | 7,788 |       |  |       |            | 
|                             | Accident and health insurance                     |                |           | 128    |        |                |         | 12                   |       |            |        |       |     |         |           | 116   |       |  |       |            | 
|                             | Supplementary contract and other funds
on deposit |                |           | 1,570  |        |                |         |                     |       |            |        |       |     |         |           | 1,570 |       |  |       |            | 
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           
|                             |                                                   | Total premiums |           | $      | 13,332 |                |         | $                    | 4,795 |            |        | $      | 937 |         |           | $     | 9,474 |  |       |            |  | 
|                             |                                                   |                |           |        |        |                |         |                      |       |            |        |        |     |         |           |       |       |  |       |           

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